REPORT ON THE ECONOMIC IMPACT OF DEFENSE-RELATED SPENDING IN ILLINOIS

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1 FEBRUARY 27, 2018 REPORT ON THE ECONOMIC IMPACT OF DEFENSE-RELATED SPENDING IN ILLINOIS 1

2 About Us The Illinois Defense Network (IDN) provides resources and expertise to businesses, policymakers, and economic development stakeholders to strengthen Illinois defense economy. An initiative of the Illinois Defense Industry Adjustment Program, the IDN is managed by the University of Illinois System and represents a coordinated effort to connect stakeholders from industry, government, and academia to raise awareness of the significance of the defense industry in Illinois. Please visit for more information and to download additional reports about Illinois defense industry.

3 Introduction In 2015, the University of Illinois System (U of I) received a grant from the U.S. Department of Defense (DoD) Office of Economic Adjustment (OEA) to assist communities in planning for adjustments and resiliency in the face of defense industry changes. A project team consisting of the University of Illinois Office of the Vice President for Economic Development and Innovation, the Nathalie P. Voorhees Center for Neighborhood and Community Improvement at the University of Illinois at Chicago (UIC), and the Quad Cities Chamber of Commerce created the Illinois Defense Industry Adjustment (DIA) Program to produce new data and insights about Illinois defense industry. As a result of this work, in 2018 the University of Illinois System launched the Illinois Defense Network to connect defense stakeholders from across the state with resources and expertise. The Illinois Defense Industry Adjustment Program secured the Strategic Development Group (SDG), a leader in assessing the economic impact of business activity on states, to evaluate the economic impact of the defense industry on the state of Illinois for calendar year They worked with the Indiana Business Research Center (IBRC) at Indiana University Bloomington, which has been researching economic impact for over 50 years. The following report was prepared by the Strategic Development Group for the University of Illinois, with financial support from the Office of Economic Adjustment, Department of Defense. The content does not necessarily reflect the views of the Office of Economic Adjustment. It is meant to serve as a guide for economic developers, policymakers, the DoD, and others interested in the defense industry to better understand the economic impact of federal defense spending in Illinois. In this report, economic impact is described in terms of DoD contract and grant spending by Illinois entities, as well as military and civilian DoD personnel compensation in Illinois. Collect Data Map Supply Chains Deliver Insights 1

4 EXECUTIVE SUMMARY Illinois boasts a strong manufacturing sector and significant defense assets, but it is not generally considered to be a defense-dependent state. In FY 2015, DoD spending in Illinois totaled $7 billion, ranking the state 19th nationally in total defense spending (contracts plus personnel-related spending) 1. In addition, Illinois is home to three active military installations Rock Island Arsenal, Scott Air Force Base, and Naval Station Great Lakes and has National Guard Installations in Peoria, Springfield, and North Riverside. 1 FY2015 OEA Spending Report: Chmura Economic and Analytics; United States Department of Defense, Office of Economic Adjustment. (2016). Defense Spending by State Fiscal Year Arlington, Virginia. 2 A Report from the Illinois Defense Network

5 Key Findings $8.0 BILLION 2 IN ESTIMATED SPENDING FROM DoD CONTRACTS AND GRANTS IN 2016, accounting for either Vendor Location (VL) or Place of Performance (POP). TOTAL VALUE ADDED IMPACT OF DoD SPENDING ANNUALLY $11.8 BILLION 136,574 JOBS For EVERY 100 JOBS attributable to DoD spending, an ADDITIONAL 60 JOBS are created in the state. NEARLY 1.5% OF THE STATE S $791.6 BILLION DOMESTIC PRODUCT IN 2016 DoD CIVILIAN EMPLOYEES: 12,510 ACTIVE DUTY PERSONNEL: 17,856 NATIONAL GUARD AND RESERVE PERSONNEL: 24,508 $2.4 BILLION ESTIMATED COMBINED COMPENSATION FOR CALENDAR YEAR 2016 $4.8 BILLION TOTAL ECONOMIC OUTPUT EFFECT IN ILLINOIS FROM ALL DoD-RELATED PAYROLL WHICH GENERATES TOTAL DoD SPENDING CREATED MORE THAN $645 MILLION In state and local tax revenues in Illinois in calendar year % Defense spending s largest employment impact is on the professional, scientific, and technical services and construction industries, which together accounted for approximately 26% of total employment impacts 2 After adjusting for subcontract outflows and inflows, this study estimates that all contracts with a Vendor Location or Place of Performance in Illinois generate their impact within the State. 3

6 Methodology Defense-related economic impact studies often define Place of Performance as the location of where most contract work is completed, and therefore, the location of the greatest impact. To account for additional economic impacts not incorporated in this definition, the research team also utilized the category Vendor Location. To determine the economic impact of DoD spending for the state of Illinois, three types of data were utilized: 1. Department of Defense (DoD) contracts and associated sub-contracts 2. Total employee compensation of DoD s military and civilian personnel residing in Illinois 3. DoD grant awards and grant sub-awards to Illinois institutions Table 1 below illustrates how these two data elements were used. SDG DEFENSE CONTRACTOR ECONOMICS IMPACT RELIABILITY ANALYSIS METRIC ILLINOIS VENDOR LOCATIONS (VL)? ILLINOIS PLACE OF PERFORMANCE (POP)? DESIGNATION CERTAINTY OF ECONOMIC IMPACT TABLE 1 Yes Yes Yes No IL firm & work performed in IL IL firm & work performed outside IL Very Reliable Questionable No Yes Non-IL firm & work performed in IL Very Questionable For the purposes of estimating economic impact, DoD grants to Illinois institutions were treated in the same manner as contracts awarded to Illinois companies and then rolled into appropriate NAICS codes 3. Calendar year 2016 was the most recent complete year used for this analysis. All financial data is expressed in 2016 current dollar values. The analysis used IMPLAN (IMpact analysis for PLANning) economic modeling software to estimate the effects of defense-related spending in Illinois at the state level. The IMPLAN system draws on a variety of secondary data sources to create a detailed model of the state s economy 4 and is a widely-used economic impact analysis program based on a regional input-output model. Using a combination of national benchmark input-output data and regional information, the IMPLAN software models the way a dollar injected into one sector is spent and then circulated through other sectors of the economy, generating waves of economic activity, or so-called economic multiplier effects. It then applies the value of an event to local and national sector-specific production functions and traces these values through subsequent cycles of transactions and payments to estimate the indirect and induced impacts. During each of these cycles, the procedure removes expenditures to government, savings, and extra-local purchases, so that the results reflect only those transactions that impact the local economy. Please see the appendix for further methodological details. 3 The North American Industrial Classification System (NAICS) classifies business establishments for the purpose of collecting data on the U.S. economy; NAICS industry codes shows the primary activities in which a business is engaged A Report from the Illinois Defense Network

7 SUMMARY OF ECONOMIC OF DEFENSE-RELATED SPENDING IN ILLINOIS This section of the report first analyzes DoD contract and grant spending, and then presents economic impacts associated with DoD payroll spending. The last part discusses combined DoD impacts in Illinois. 5

8 Economic Impacts of DoD Contract and Grant Spending Table 2 below shows DoD contract/grant spending in 2016 in Illinois by type of firm (i.e., by Vendor Location and Place of Performance). By assessing the likelihood that DoD contract spending occurred inside Illinois, DoD spending was sorted into three reliability categories in order to explore the full range of potential economic impacts DoD CONTRACT (INCLUDING GRANT) SPENDING TOTALS IN ILLINOIS BY TYPE OF FIRM CONTRACTOR TYPE CONTRACT SPENDING (MILLIONS) Illinois firm/work performed in Illinois $4,293 TABLE 2 Illinois firm/work not performed in Illinois $2,573 Non-Illinois firm/work performed in Illinois $1,106 Total $7,972 Source: Strategic Development Group and Indiana Business Research Center Defense contractors in the state of Illinois received a total of nearly $8.0 billion from DoD contracts in In addition to these direct effects, the activities related to these contracts triggered additional economic effects that cascaded throughout the state s economy. An example would be an Illinois-based transportation equipment manufacturer (that contracts with DoD) purchasing a range of goods and services, such as vehicle parts, maintenance services, or office supplies from other businesses in the state. The economic effects of these supply chain purchases are reported in the indirect effects columns in the following tables. In addition, workers at the state s defense contractors as well as employees at supplier firms spend their earnings on groceries, housing, entertainment, health care, etc. The impacts of this household spending are presented in the induced effects column. As noted earlier, the IMPLAN economic modeling software is used to estimate these ripple effects of defense-related spending in Illinois. In this report, the values for indirect and induced effects will often be combined and simply referred to as ripple effects. The following tables (Tables 3, 4, and 5) present impact estimates for each of these categories as well as the estimated total 5. DoD Contract awarded to Company A in Illinois Company A s Purchase of Inputs from Illinois Contractors + Contractors Own Supply Chains in Illinois Consumer spending of Company A + Consumer spending out of employees income in the Company A Direct + Indirect + Induced DIRECT IMPACT INDIRECT IMPACT INDUCED IMPACT TOTAL IMPACT Note: This figure is adapted from Oxford Economics (2015). 5 The sum of these three categories ($7.972 billion) and corresponding impact estimates should be interpreted as the maximum potential DoD contract & grants spending occurred in 2016 in Illinois. As presented in Table 1, impacts attributable to contracts with Vendor Locations in Illinois (first two rows in Table 2 and Tables 3 through 5) are more likely estimates than those impacts attributable to contracts with Vendor Locations outside of Illinois. 6 A Report from the Illinois Defense Network

9 Table 3 shows that the nearly $8.0 billion of DoD contracts with Illinois firms in 2016 spurred a combined $6.2 billion in additional economic output (i.e., sales) at other businesses in the state. These effects bring the total sales footprint of DoD contracts in Illinois to an estimated $14.1 billion in A helpful way to interpret these effects is to look at the multiplier associated with DoD contracts. The ratio of total effects to direct contract awards yields a multiplier of This means that each dollar of DoD contract spending in Illinois generates another $0.77 in sales at other businesses in the state. These multipliers are referred to as output multipliers, which describes the total Output generated as a result of one dollar of Output in the target industry. $14.1 BILLION Total 2016 sales footprint of DoD contracts in Illinois OUTPUT IMPACTS OF DoD CONTRACT SPENDING IN ILLINOIS, 2016 ($ MILLIONS) Due to the rounding of decimal points, row and column totals might not be equal to the total output effects. CONTRACTOR TYPE DIRECT CONTRACT AWARDS INDIRECT OUTPUT INDUCED OUTPUT TOTAL OUTPUT OUTPUT MULTIPLIER Illinois firm/work performed in Illinois $4,296 $1,659 $1,562 $7, TABLE 3 Illinois firm/work not performed in Illinois $2,573 $1,000 $1,077 $4, Non-Illinois firm/ Work performed in Illinois $1,106 $416 $455 $1, Total $7,975 $3,075 $3,094 $14, While the spending impacts provide a useful headline number for understanding the effects of DoD contract spending, the Gross Domestic Product (GDP) impacts offer a more meaningful measure of the importance of these activities (GDP is simply a measure of business sales after subtracting the costs of supply chain purchases or the sum of value-added). The GDP estimates presented in Table 4 are analogous to the official GDP figures released at the national and state levels. The defense spending associated with contracts awarded in Illinois led to an estimated $6.7 billion in total GDP effects in the area. The multiplier of 2.13 suggests that for every dollar of direct GDP triggered by defense contract spending in the state, an additional $1.13 is added in Illinois to the state GDP. 7

10 $6.7 BILLION Total GDP effects in Illinois due to DoD contracts spending These multipliers are referred to as value-added multipliers, which describe the total dollars of value added (or contribution to GDP) generated as a result of one dollar of value added in the target industry. Value-added multipliers cannot be compared to output multipliers. They refer to very different concepts. Only a portion of a dollar of output in any industry represents a contribution to value added. Simply put, value added is the compensation of employees, profits, and taxes left over after subtracting the cost of all intermediate goods and services purchased to produce that output. The output multiplier essentially measures the cumulative topline sales of all participants in the value chain, without removing the interfirm purchases within the state. The value-added multiplier only cumulates the net additions to value added (or GDP) at each stage of the value chain, without any double counting. GDP IMPACTS OF DoD CONTRACT SPENDING IN ILLINOIS, 2016 ($ MILLIONS) CONTRACTOR TYPE DIRECT GDP INDIRECT GDP INDUCED GDP TOTAL GDP VALUE-ADDED MULTIPLIER Illinois firm / Work performed in Illinois $1,643 $921 $923 $3, TABLE 4 Illinois firm / Work not performed in Illinois Non-Illinois firm / Work performed in Illinois $1,039 $568 $636 $2, $470 $235 $269 $ Total $3,152 $1,724 $1,827 $6, $8.0 BILLION in DoD contract spending supported 66,290 jobs The nearly $8.0 billion in DoD contract spending supported an estimated 30,340 direct jobs at defense contractors in the state (see Table 5). The supply chain purchases and household spending associated with these contracts supported an estimated 35,950 additional jobs at other Illinois businesses to bring the entire employment footprint of DoD contracts in the state to an estimated 66,290 jobs. The employment multiplier of approximately 2.2 indicates that every job supported directly by DoD contract spending generates another 1.2 jobs in Illinois (or every 10 direct jobs supports nearly 12 additional jobs at other businesses in the state). IMPACTS OF DoD CONTRACT SPENDING IN ILLINOIS, 2016 CONTRACTOR TYPE DIRECT INDIRECT INDUCED TOTAL MULTIPLIER TABLE 5 Illinois firm / Work performed in Illinois Illinois firm / Work not performed in Illinois Non-Illinois firm / Work performed in Illinois 14,140 8,130 10,440 32, ,790 5,030 7,200 24, ,410 2,110 3,040 9, Total 30,340 15,270 20,680 66, A Report from the Illinois Defense Network

11 Table 6 lists the top industries in terms of largest employment effects in the state from defense contract spending. With nearly $2.4 billion in DoD contracts in 2016, professional, scientific, and technical services firms had the largest total employment effects with an estimated 17,730 jobs. Construction activities in the state represented approximately $1.3 billion in defense contract spending in 2016, leading to an estimated total employment impact of 17,570 jobs. Computer and other electronics manufacturing, wholesale trade, and transportation equipment manufacturing rounded out the top five industries. Table 6 focuses on the top impact generating industries. These are the industries that received the largest amounts of contract dollars. Table 6 also details the employment economic impacts generated from each of these defense-supplier industries with large contracts. $2.4 BILLION in DoD contracts in 2016 in professional services TOP JOB-GENERATING INDUSTRIES WITH THE LARGEST TOTAL IMPACTS FROM DoD CONTRACT SPENDING, 2016 INDUSTRY TOTAL CONTRACTS ($ MILLIONS) DIRECT INDIRECT INDUCED TOTAL MULTIPLIER Professional, Scientific, and Technical Services $2, ,160 4,270 6,300 17, Construction $1, ,280 2,960 4,330 17, Computer and Electronic Product Manufacturing $ ,730 1,800 2,430 7, Wholesale Trade $1, ,690 1,940 2,430 7, TABLE 6 Transportation Equipment Manufacturing $ ,670 1,080 1,400 4, Machinery Manufacturing $ , Fabricated Metal Product Manufacturing $ , Chemical Manufacturing $ , Administrative and Support Services $ Truck Transportation $ Note: IMPLAN s input-output structure has 536 sectors. The sectoring schemes represent rollups of NAICS descriptions, and each sector has its own spending pattern derived from the U.S. Bureau of Economic Analysis (BEA) expenditures patterns. IMPLAN s sectors directly correspond to varying combinations of 3 6-digit NAICS codes, with the exceptions of construction, and a few other special sectors that are not relevant to this economic impact analysis. IMPLAN construction sectors are classified by structure type (Census definitions) rather than NAICs codes; and a 3-digit roll-up is essentially identical to the NAICS 2-digit construction definition. IMPLAN treats Wholesale Trade as its own sector even at the 536 sector level, and is equivalent to the NAICS 2-digit wholesale trade definition. All other IMPLAN 3-digit roll-ups in this analysis correspond to NAICS 3-digit industry codes. See 9

12 The next three tables take a different perspective on employment impacts by listing the industries that benefit most from the ripple effects of DoD contracts which can be referred to as receiving industries. Table 7 shows that ambulatory health care services and government are the largest beneficiaries of the indirect employment effects of DoD contracts, while Table 8 indicates that government; performing arts and spectator sports; and hospitals claim the greatest induced impacts. Table 9 provides a list of industries that reap the largest total employment impacts generated by DoD contract spending. Not surprisingly, the construction and professional, scientific, and technical services industries are the largest employment impact receiving industries. The employment numbers listed in Table 9 reflect only the jobs supported in those specific industries because of DoD contracts and details whether those jobs are the result of direct, indirect, or induced effects. So, from this perspective, DoD contracts support a significant number of direct jobs in construction, but the ripple effects of all DoD contracts generate relatively few construction jobs. Alternatively, Table 6 lists the direct employment impacts in each specific industry as well as employment ripple effects these specific industries generated for Illinois employers in all other industries. This distinction is the reason why multipliers are listed in Table 6 but not Table 9. TOP JOB-RECEIVING INDUSTRIES WITH THE LARGEST INDIRECT IMPACTS FROM DoD CONTRACT SPENDING, 2016 INDUSTRY INDIRECT Ambulatory Health Care Services 1,810 Government 1,740 Management of Companies and Enterprises 750 Accommodation 740 TABLE 7 Food Manufacturing 730 Employment Services 690 Repair and Maintenance Services 670 Services to Buildings 490 Architectural, Engineering, and Related Services 480 Marketing Research and all other miscellaneous Professional, Scientific, and Technical Services A Report from the Illinois Defense Network

13 TOP JOB-RECEIVING INDUSTRIES WITH THE LARGEST INDUCED IMPACTS FROM DoD CONTRACT SPENDING, 2016 INDUSTRY INDUCED Government 2,400 Performing Arts, Spectator Sports, and Related Industries 1,200 Hospitals 1,160 TABLE 8 Social Assistance 1,030 Full-Service Restaurants 1,020 Limited-Service Restaurants 980 Ambulatory Health Care Services 700 Offices of Physicians 580 All Other Food and Drinking Places 530 Food Manufacturing 480 JOB-RECEIVING INDUSTRIES WITH THE LARGEST TOTAL IMPACTS FROM DoD CONTRACT SPENDING, 2016 INDUSTRY DIRECT INDIRECT INDUCED TOTAL Construction 10, ,500 Professional, Scientific, and Technical Services 7, ,230 Government 20 1,740 2,400 4,150 Computer and Electronic Product Manufacturing 3, ,030 TABLE 9 Wholesale Trade 2, ,720 Ambulatory Health Care Services 150 1, ,660 Transportation Equipment Manufacturing 1, ,710 Limited-Service Restaurants ,420 Food Manufacturing ,360 Performing Arts, Spectator Sports, and Related Industries ,200 1,320 11

14 54,874 ILLINOIS RESIDENTS WORKED FOR DoD DoD CIVILIAN EMPLOYEES: 12,510 ACTIVE DUTY PERSONNEL: 17,856 NATIONAL GUARD AND RESERVE PERSONNEL: 24,508 Economic Effects of Department of Defense Payroll to Illinois-Based Personnel National defense also impacts the Illinois economy through the compensation earned by resident military and civilian personnel. The research team estimated approximately 12,510 Illinois residents were DoD civilian employees; 17,856 were active duty personnel; and 24,508 were National Guard and Reserve personnel. Approximately 54,874 Illinois residents worked for DoD, earning an estimated $2.4 billion in compensation in The household spending associated with these earnings generated $2.3 billion in spending at businesses in the state (i.e., Output). This household spending of DoD employees resulted in nearly $1.4 billion in estimated induced GDP effects in the state as well as $785 million in additional labor income in Illinois (see Table 10). ECONOMIC OF ILLINOIS DoD PAYROLL, TABLE 10 Employee Compensation (millions) DIRECT 8 INDUCED TOTAL MULTIPLIER $2,430 $785 $3, Output (millions) $3,715 $2,333 $6, GDP (millions) $3,715 $1,379 $5, Employment 54,874 15,410 70, Note: Since compensation is an Induced effect by definition, there is no direct or indirect effect for Output and GDP. These values were generated as a means of comparison to the other effects. The Direct and Total Effects entries for output and GDP are not included in the summary tables (Tables 11 13). Total Economic Effects of Defense- Related Spending in Illinois When the effects of defense contracts, grants, and DoD payroll are combined, the total economic output contributions of defense-related spending in Illinois jumps to an estimated $20.1 billion in 2016 (see Table 11), resulting in a contribution to GDP of nearly $11.8 billion (Table 12). The multiplier of 1.72 suggests that every defense-related dollar spent in Illinois triggered an additional $0.72 in economic activity in the state. The full employment effect of defense contracts, grants and DoD payroll is an estimated 135,574 jobs in Illinois, with nearly 85,214 9 positions tied directly to defense activities along with more than 53,000 ripple effect jobs (see Table 13). With an employment multiplier of 1.6, every ten defense-related jobs in the state supports another 6 jobs at other businesses in Illinois. 6 If requested, the UIC Voorhees Center (part of the IDN s leadership team) can provide the methodology used to generate this compensation estimate. 7 Within IMPLAN s analysis framework, employee compensation only generates induced economic effects. Therefore, there are no indirect effects reported in Table 10. Also note that output, GDP, and employee compensation are all related concepts. Output represents the total value of an economic activity, while GDP is a subset of output that represents only value added and ignores the cost of production inputs, and employee compensation is one component of GDP. 8 DoD employment includes many people not at an installation, most notably reservists, but also recruiting stations, ROTC instructors, and others. 9 This figure is comprised of DoD civilian employees, active duty personnel, national guard and reserve personnel, and employees of Illinois businesses that directly work on DoD contractors. 12 A Report from the Illinois Defense Network

15 TOTAL OUTPUT IMPACTS OF DoD SPENDING IN ILLINOIS, 2016 ($ MILLIONS) ACTIVITY TYPE DIRECT INDIRECT INDUCED TOTAL MULTIPLIER TABLE 11 DoD Contracts 7,975 3,075 3,095 14, DoD Installation Payroll 3, ,333 6, Total 11,690 3,075 5,428 20, TOTAL GDP IMPACTS OF DoD SPENDING IN ILLINOIS, 2016 ($ MILLIONS) ACTIVITY TYPE DIRECT INDIRECT INDUCED TOTAL MULTIPLIER TABLE 12 DoD Contracts $3,152 $1,724 $1,828 $6, DoD Installation Payroll $3,715 $0 $1,379 $5, Total $6,867 $1,724 $3,207 $11, TOTAL IMPACTS OF DoD SPENDING IN ILLINOIS, 2016 ACTIVITY TYPE DIRECT INDIRECT INDUCED TOTAL MULTIPLIER TABLE 13 DoD Contracts 30,340 15,270 20,680 66, DoD Installation Payroll 54, ,410 70, Total 85,214 15,270 36, , TOTAL STATE AND LOCAL TAX IMPACTS FROM DEFENSE SPENDING, 2016 ($ MILLIONS) ACTIVITY TYPE SALES TAXES PROPERTY TAXES INCOME TAXES OTHER TAXES AND FEES TOTAL TABLE 14 DoD Contracts $146 $180 $90 $97 $512 DoD Installation Payroll $43 $53 $17 $22 $134 Total $188 $233 $106 $118 $646 13

16 TYPES OF ECONOMIC ACTIVITIES Employment the annual average of monthly jobs in the economy/ industry. The number consists of both full-time and part-time jobs. Value Added (GDP) the difference between the total output of an industry or an establishment and the cost of its intermediate inputs for a year. Value added is calculated as the payment to labor (employee compensation) and rent to capital (profit) plus business taxes. Value added is a measure of the contribution to gross domestic product (at the national, state, or local scale) made by an individual producer, industry, or sector. Output the value of annual industry production. Output is reported in producer prices, separating margins for wholesale distribution, transportation, and retail into those respective industries. Tax Revenues the annual taxes collected by state and local governments through income, payroll, import, corporate, and property taxes, as well as some forms of licenses. Tax revenue estimates are generated from the application of average (per capita and per employee) tax rates and license fees averaged across multiple jurisdictions within a study region and should be treated as only rough approximations. MULTIPLIERS Employment multiplier the estimated ratio of the change in total state employment to the change in direct employment. For example, an employment multiplier of 3.00 indicates that the creation of 1 direct new job is expected to support 2 additional jobs in the state economy, for a total impact of 3 new jobs. Value-added (GDP) multiplier the estimated ratio of the change in total value added throughout the state economy to the change in value added from direct employment. The valueadded multiplier is calculated analogously to the employment, income, and output multipliers. Output multiplier the estimated ratio of the change in total output (i.e., gross sales and additions to inventory) throughout the economy to the change in output from direct employment. The output multiplier is calculated analogously to the employment, income, and value-added multipliers. $646 MILLION in state and local tax revenues In addition to jobs and increased business sales, defense spending also generates government revenues. The IMPLAN model estimates that the levels of spending outlined previously resulted in $645.8 million in state and local tax revenues in 2016 (see Table 14). The majority of these revenues were collected through sales and property taxes. Reviewing Illinois 2016 DoD Contracts from the Perspective of Recent Years Figure 2 below shows the total value of defense contracts for the state of Illinois from 2008 through After falling by nearly 50% from 2008 to 2014, 2015 and 2016 saw significant improvement, though still significantly below earlier levels. This could represent a bottoming out, but only data from subsequent years will determine whether this is the beginning of an upward trend. It is also important to note that, because many contracts are multiyear, the economic effects of a downward trend will have a lagging impact on the revenues for companies. Only a more detailed industry-by-industry analysis would allow us to estimate to how these trends might affect a given sector. Value of Contract Dollars Performed, Billions of US Dollars Figure 2 $8.1 $7.0 $6.3 $6.5 $6.1 $5.4 $4.1 $4.8 $ The 2008 to 2015 data are reported by The DoD Office of Economic Adjustment on an annual basis. The data appears to be estimated annual Place of Performance DoD sales. It is unclear what exact procedures OEA used, but the Illinois Place of Performance data estimated for 2016 in Table 2 of this report is roughly comparable and provides an additional year to the trend line. 14 A Report from the Illinois Defense Network

17 136,574 JOBS TOTAL IMPACTS OF DoD SPENDING IN ILLINOIS $20.1 BILLION TOTAL SALES THROUGHOUT THE STATE ECONOMY $11.8 BILLION TOTAL VALUE ADDED IMPACT OF DoD SPENDING ANNUALLY $645 MILLION TOTAL STATE AND LOCAL TAX REVENUES 15

18 CONCLUSION THE DEFENSE INDUSTRY HAS A SIZEABLE AND IMPORTANT IMPACT ON ILLINOIS ECONOMY. The total defense spending supports more than 136,500 jobs and is responsible for more than $20 billion in sales throughout the state economy. In addition, defense spending contributes substantially to state and local government revenues. IN 2016, DEFENSE SPENDING GENERATED NEARLY $646 MILLION IN TAX REVENUES. The $11.8 billion in value added as a result of defense spending in Illinois represents approximately 1.5 percent of the state s $791.6 billion domestic product in U.S. Bureau of Economic Analysis. 16 A Report from the Illinois Defense Network

19 Because Illinois economy is large and not dominated by any single industry, looking at the defense industry s impact as a percentage of the state s overall GDP can be misleading. Defense impacts at the industry level are largely concentrated in the following sectors: professional, scientific, and technical services; manufacturing; construction; and wholesale trade. Future analysis should focus on industry-level relative dependencies to better understand defense impacts on the state economy. For some industries, defense spending may account for a disproportionally large share of their sales, or defense-related employment may constitute a significant portion of overall industry employment. In addition, impact estimates reported for the state as a whole may be concentrated at different rates in different parts of the state. Regionallevel analyses would highlight local concentrations of defense impacts in the state. 136,500+ JOBS Supported by defense spending $20.1 BILLION in sales throughout the state economy Based on DoD dollars spent in the state in FY2015, Illinois ranks 19th nationally 12, revealing deep ties to the defense industry. From 2008 through 2014, the state of Illinois experienced a continual decline in the total value defense contracts. However, that decline reversed in 2015, and in 2016 the total defense contract value increased further to $5.4 billion. In terms of attracting new defense contracts to the state, the findings in this report suggest giving priority to those industries with the largest economic impact multipliers (e.g., machinery manufacturing, fabricated metal product manufacturing, transportation equipment manufacturing; wholesale trade; and professional, scientific, and technical services). Relatively large multipliers (nearly 2.5 or greater) for these sectors indicate that the supply chains producing the goods and services associated with these industries are mostly located within the state, which means that once DoD money enters into one of these high-multiplier industries in Illinois, there is relatively little leakage of dollars to out-of-state businesses. As economic developers and policymakers consider the various business opportunities and threats facing Illinois, it is clear that attention must be paid to the defense industry and its important impacts on several parts of the state s broader economy. 12 FY2015 OEA Spending Report: Chmura Economic and Analytics; United States Department of Defense, Office of Economic Adjustment. (2016). Defense Spending by State Fiscal Year Arlington, Virginia. 17

20 Footnotes? APPENDIX: Estimation Procedure for Defense Contract Spending in Illinois Information was collected from USAspending.gov, a publicly available search engine that allows users to pull aggregated data from the Federal Procurement Data System (FPDS) for prime contracts, and the Federal Funding Accountability and Transparency Act (FFATA) Subaward Reporting System (FSRS) for sub-contracts and grant awards. 18 A Report from the Illinois Defense Network

21 In order to utilize data that is both current and complete to the maximum extent feasible, any company with an active contract in calendar year 2016 was identified. Because there is a lag between the awarding of new contracts and the availability of information on those contracts in FPDS/FSRS, the most recent data available runs through the first quarter of Based on reviews of economic impact analyses from other OEA-funded projects and prior experience working with federal data, there are recognized reliability issues with FPDS and FSRS data. A framework was created to address some of the known ambiguities with the federal data. Of particular importance, it appears that other studies have assumed that the DoD category Place of Performance (POP) was an accurate indicator of where the work was performed and where the contract dollars were spent. However, research on the understanding of POP indicates that this assumption is invalid. There is a wide variation in how POP is understood by the company representatives providing that information to the federal government. Characterizing the reliability of POP is extraordinarily important in conducting an Economic Impact Analysis (EIA). The direct, indirect, and induced impacts are based on the assumption that where the work is performed is primarily where the dollars are spent in wages or on services and suppliers. POP data as reported through FPDS is insufficient to determine where the majority of work was completed for a defense contract. In general, the reliability of the FPDS/FSRS data has a range of known problems 13. A Congressional Research Service white paper specifically deals with reliability issues associated with the POP: This paper s definition of Place of Performance represents data that federal agencies have captured as part of the oversight and management of federal grants and contracts, despite the fact that this term has not been defined in government-wide regulations. Agencies are dependent on awardees and recipients reporting this data during different points in the award lifecycle. In contracting reporting instructions for many years, the Place of Performance was the location of the principal plant or place of business where the supply items will be manufactured; where finished products will be taken from inventory; or, for services, the principal location where the service will be performed 14. FPDS/FSRS (via USAspending.gov) provides only the following fields with regard to POP: city, country, zip code, and congressional district. The database does not include the name of the POP establishment, DUNS number, or any information with respect to a point of contact such as address, phone, or . That information is only provided for the prime or sub-awardee. In summary, there is nothing in the data to provide a definitive location for a POP. The following impact analysis is based upon a more refined understanding of the accuracy of reported POP as the location where the work is performed. The reliability buckets in this analysis are based both on POP and the Vendor Location (VL) of the primary awardee or sub-awardees. Because of the level of aggregation, the analysis did not provide a broader breakdown based on manufacturers and service providers in the basic tables, but did provide aggregations by sector based on three-digit NAICS 15. In addition to POP, a second complication in analyzing economic impact concerns the fact that USAspending.gov does not include the payments; it records only the contract amount and any subsequent modifications. Because many of the contracts are multiyear and because an EIA requires revenue totals for one year, it is necessary to estimate these figures based on the length of the contract, its initial amount, and any modifications. In order to capture all the active contracts in the study year, this analysis identified any company that signed a contract going back to 2009 with an ultimate completion date that extended into or beyond Taking into account the reliability factor, the following methodology was used for arriving at our estimates. 13 See Defense Acquisitions: How and Where DoD Spends and Reports Its Contracting Dollars by the Congressional Research Service, December, 2016 at the following link: 14 The reliability of POP information is discussed in the following white paper published in August, 2015: whitepapers/place-of-performance/. 15 Detailed CY2016 award estimates, adjusted for subaward flows, by 3-digit NAICS and reliability bucket are provided separately. 19

22 Data was downloaded for each year from 2009 through the first quarter of 2017 for prime and sub awardees based on the obligation date and the following criteria: A contractor located anywhere in the United States with a Place of Performance for a DoD contract within Illinois, during CY2016 A contractor located within Illinois and with a Place of Performance for a DoD contract anywhere in the world, including Illinois, during 2016 A further complication was the need to adjust the prime award data by associated sub-awards to avoid double counting. All of these totals were adjusted to account for subcontract outflows and inflows. With this information, algorithms were created to calculate the value of contract work for each company across the given years and for the leading individual sectors based on three-digit NAICS codes. These companies include both manufacturing and non-manufacturing contractors as well as grant recipients. For the purposes of this study, all non-manufacturers and grant recipients are referred to as service providers. Discriminations were made on the relative reliability (whether or not the spending was inside Illinois) of this information based on the Vendor Location and Place of Performance of the contractor as described in Table 1. The buckets in Table 1 provide the basis for comprehensive aggregation of the data within a framework that provides firmer guidance for its reliability. Therefore the presented tables in this report are organized by: Illinois firm / Work performed in Illinois Illinois firm / Work performed outside Illinois Non-Illinois firm / Work performed in Illinois First, those contracts were selected out of the total set of defense contractors that were awarded to a company with a Vendor Location anywhere in United States and which listed Illinois as the Place of Performance as illustrated as blue in the diagram below. Additionally, contracts awarded to any company with a Vendor Location within the state of Illinois were selected. There is, of course, considerable overlap between these two criteria. The aggregated annual value of each contract was calculated by compiling the reported base value of the Figure 1: VL & POP Overlap Vendor Location In Illinois Place of Performance In Illinois award as well as all subsequent logged adjustments (both positive and negative) along with the value of any exercised options. Based on the effective date and completion date (actual or anticipated) the value of each individual contract was divided by the length of the contract in months in order to produce a monthly average value. After adjusting for subcontract awards using the same spreading methodology, the sum total of these values for the number of months for which the contract was active over 2016 was calculated to arrive at the impact in the target year. This is the reasoning behind the methodology for the reliability designations and the aggregated values estimated for contracts. 20 A Report from the Illinois Defense Network

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