From Foresight, Vol. 6, No. 1
published 1999
Military activity has long been a major economic force in Kentucky. The military is easily the largest employer among organizations in Kentucky that could feasibly operate outside the state. Among industries that export their product out of state, the military has the fourth largest payroll—trailing only motor vehicle and equipment manufacturing, industrial machinery manufacturing, and coal mining. Kentucky ranks tenth largest among the fifty states in the number of active duty military personnel. On a per capita basis, the military spends more in Kentucky than in any bordering state except Virginia.
During the past decade, the federal government has both reduced real defense spending and rearranged the pattern of expenditures by type and geography. Kentucky has taken some major hits, including a reduction in armed forces at Fort Knox, the closure of the Lexington-Bluegrass Army Depot, the relocation of the Defense Mapping Agency in Louisville, and the privatization of Louisville’s Naval Ordnance Station. Overall, military personnel in Kentucky has declined by 12,000 since 1987. Nevertheless, nominal military expenditures have risen here over the last decade, and the state’s share of U.S. military payroll has been stable.
Elected officials, economic development professionals, and military leaders are now preparing for the next round of base closure decisions and are examining opportunities for better leveraging Kentucky’s considerable military assets. The Kentucky Commission on Military Affairs and the Louisville Redevelopment Authority commissioned us to perform a study of the importance of the military in the state and to develop a methodology for estimating the economic impact of changes in military activity. The Commission subsequently engaged us to develop a strategy for enhancing the economic value of military in Kentucky. In this article we present some of the findings to date.
For many decades, military activity in the region has been a major source of employment for Kentucky residents, sales for Kentucky companies, and tax revenues for state and local governments in Kentucky. The military is now spending about $3 billion per year in Kentucky through direct payrolls to soldiers and civilians, through retirement and veterans benefits, and through contracts with companies around the state (see Figure 1).
Figure 1: Annual Military Spending in Kentucky
There were 66,000 military personnel in Kentucky as of the end of September 1996, down 15 percent from a decade ago. The decrease in total real military spending and the decisions of the Base Realignment and Closure Commission (BRAC) have led to a decline in active duty, civilian, reserve, and national guard forces stationed in Kentucky. The Navy’s civilian presence in the state has fallen the most of any category, from 2,400 workers at the former Naval Ordnance Station to only 400 in 1996.
Despite national changes, total spending in all military categories grew in Kentucky over the last decade. The state’s share of national activity is slightly higher than it was 10 years ago. Indeed, Kentucky’s military presence stands out among bordering states, surpassing all but (Washington, D.C.-proximate) Virginia in most comparative measures. Focusing on the Army alone, Kentucky stands out nationally with more personnel than populous states such as Illinois and Ohio. The Army and other branches of the armed services had a combined annual payroll of over $1.1 billion dollars (plus fringes) in 1996, making the military the fourth largest industrial source of earnings for workers in Kentucky. Only two manufacturing sectors and coal mining generate more direct payroll than the military (Figure 2). Military payrolls in Kentucky are larger than those of most other prominent state export industries, such as farming, appliance production, aluminum, and food and beverages processing. Given the military’s pervasive links to the construction, transportation, and manufacturing industries, it would be fair to say that in dollar terms it is as important as mining and farming to Kentucky. Moreover, the military (counting only active duty and civilian workers) is the largest single employer among mobile organizations in the state (Figure 3).
Figure 2: Labor and Proprietors' Earnings, Kentucky, 1996
Figure 3: Employment by Mobile Organization in Kentucky, 1996
Fort Campbell and Fort Knox have the largest concentrations of military activity in the Kentucky area, and combined they account for 60 percent of military personnel and 70 percent of military payroll statewide. Fort Campbell has over 25,000 personnel, mostly active duty soldiers in the Army’s 101st Airborne Division. Fort Knox has around 14,000 personnel, of which roughly two thirds are active duty military and one third are civilians. Fort Knox is headquarters and a major training site for the Army’s armored divisions and headquarters for the Army Recruiting Command.
Other large operations include the Army Corps of Engineers regional headquarters in Louisville and their projects throughout Kentucky; the Bluegrass Army Depot in Richmond; and the National Guard and Army Reserve positions around the state. See Figure 4 for the geographic distribution of military personnel around Kentucky.
Military dollars flowing into Kentucky each year include retirement, disability, and other benefits to veterans and retired military personnel. These dollars are spread geographically around Kentucky, following the residential decisions of the recipients. The largest concentration of benefits is in counties proximate to Fort Knox and Fort Campbell, and containing the largest cities in the state. About 60 percent of these benefits flow to residents in just 10 Kentucky counties: Hardin, Jefferson, Fayette, Christian, Meade, Warren, Daviess, Madison, Kenton, and McCracken.
Military retirees can, of course, live wherever they choose. Like civilian retirees, they tend to choose southern states with low tax rates. Florida and Texas are traditional magnets for military retirees. Unlike civilian retirees, however, former career military personnel have an incentive to live near a large post. They can take advantage of on-post shopping and medical services at below-market prices. Hardin County, the primary host county for Fort Knox, appears to have capitalized on this economic opportunity. One half the 50,000 military retirees and dependents in Kentucky live in just five counties: Hardin, Jefferson, Christian, Meade, and Fayette.
The advantage of post proximity seems to be relatively latent in Christian, Todd, and Trigg counties in Kentucky, adjacent to Fort Campbell. According to post officials, around 85 percent of retirees in the area live across the border in Tennessee, where there is ample residential development and no state tax on wages and salaries. This statement squares with data we obtained on federal retirement payments. Retirees in the three closest Tennessee counties—Montgomery, Robertson, and Stewart—received $83 million in payments during 1995, compared to but $17 million in the three closest Kentucky counties.
There is also a large volume of retirement and veteran’s benefits going to residents of a few more rural counties, including counties around the Lake Cumberland area—Pulaski, Laurel, and Whitley—and to Pike County in far eastern Kentucky. Surprisingly, the Land Between the Lakes area appears to have drawn few military retirees or veterans—despite its proximity to Fort Campbell.
Defense contracts with Kentucky companies amounted to $874 million in 1996. The largest was with Louisville-based Humana Corporation for health care services in southeastern states. The Lexington-Richmond operations of Raytheon Corporation won the second largest contract to perform custom work for the Special Forces. Combined, these two contracts accounted for one third of all prime DOD contract awards in Kentucky.
Nearly 90 percent of all contracts were won by companies in just four Kentucky counties: Jefferson, Bullitt, Christian, and Fayette. Just across the Ohio River to the north, firms in Cincinnati and Hamilton County, Ohio, alone won $823 million in contracts during FY96, almost as much as for the entire state of Kentucky. These Ohio firms’ success in winning military business has great economic benefits for workers and residents in the northern Kentucky counties, and generates new Kentucky tax revenues and public services around the state.
Kentucky’s share of U.S. military contracts has risen over the last decade, but still accounts for less than 1 percent of the national- total. “Service Contracts” is the largest contract category for Kentucky firms. Service contracts amounted to $525 million in FY96, and the category includes most of the procurement operations to support Fort Campbell and Fort Knox. These contracts include building maintenance, food services, laundry, sanitation services, transportation, and landscaping.
Kentucky stands out nationally in two contract categories: construction and civil functions. Construction contracts amounted to $86 million in FY96 and accounted for about 2.1 percent of all such contracts nationally (and 4 percent of all Army construction contracts). “Civil Functions” refers primarily to Army Corps of Engineers operations on civilian water management projects. Kentucky companies won only $3 million in military research and development (R&D) contracts in FY96, 0.02 percent of the $20 billion in research contracts let nationally. In contrast, nearby Tennessee firms won $225 million and Alabama firms won $637 million in R&D contracts.
Military activity has a direct and easily quantifiable impact where dollars are first received—soldiers’ pay, pension checks, defense contracts awarded, and the like. However, the total economic impact is much greater. Soldiers and civilians working at posts spend much of their military pay in surrounding local economies. The installations spend millions with local vendors for maintenance, utilities, food, and supplies. Kentucky defense contractors use local subcontractors to perform some of the work. Their employees spend their military-induced incomes throughout the region. And much of the income of all of these workers and retirees ends up in the pockets of employees of grocery stores, car dealers, hospitals, law firms, banks, insurance companies, and construction firms, all of whom in turn respend the dollars.(1)
Measuring the cumulative effect of all these rounds of spending would be simpler if Kentucky were an island with a strict customs office that monitored all imports and exports. In fact, the measurement problem could hardly be more complex. Kentucky is bordered by seven states. The daily flow of people, goods, and dollars is unimpeded by state boundaries. The interstate flow is especially pervasive in a state like Kentucky, where roughly two thirds of economic activity is clustered along its borders. For example, military activity in Cincinnati, Ohio, can have tremendous effects on the well-being of Northern Kentucky residents. Over 50,000 Kentucky residents per day cross into Ohio to work. A similar story can be told for the Louisville, Ashland, Owensboro, Henderson, Hopkinsville, and Paducah area markets. Moreover, the two major military operations in Kentucky—Ft. Knox and Ft. Campbell—border the state line.
The boundary of the political entity called the State of Kentucky has little relation to the boundaries of the various markets for workers, goods, services, and media in the region. Because the economic geography is so different from the political geography, we have chosen to model military activity in the state using a two-step procedure. First, we organize military and other economic data by true economic areas, ignoring state borders. Second we calculate how much of the total military-related economic activity is captured by workers, residents, and business in Kentucky. In this way, we can respect economic boundaries when tracking important linkages and still calculate that portion of ultimate economic activity that occurs in Kentucky.
Most military spending in Kentucky counties, organized by the Bureau of Economic Analysis economic area definitions, occurs in the Louisville, Hopkinsville, and Lexington areas. Spending is great in every military category in the Louisville economic area, and civilian military payroll there is the largest in the state, due primarily to Fort Knox. The Hopkinsville area has the greatest payroll for active duty military personnel due to Fort Campbell. The Lexington area is home to the Bluegrass Army Depot, as well as the large Raytheon contract operations. All regions contain Kentucky counties with some of each type of military spending. Retirees and veterans are clustered primarily around major cities and military installations. National Guard personnel reside in every Kentucky county.
Using spending profiles and detailed industrial multipliers, we have made regional estimates of the economic and fiscal impact of changes in military activity around Kentucky. We consider the gain/loss in revenues to Kentucky firms, jobs, and earnings to workers in Kentucky, and income and sales tax receipts to Kentucky state government due to increases/de-creases in soldiers, civilian workers, military retirees, and DOD contracts. In particular, we examine the impact of 1,000 soldiers, 1,000 civilian workers, 1,000 retirees, and $10 million in contracts at various sites.
The effect in Kentucky of soldier deployments is greatest at Fort Knox and at the Bluegrass Army Depot. At Fort Knox, for example, we estimate that 1,000 more soldiers would lead to 1,266 total new jobs in the state, a new payroll of $33 million, and nearly $900,000 in new state tax receipts. We estimate a similar job and payroll impact at Fort Campbell The estimated fiscal impact of new soldiers at Fort Campbell is much smaller because so little of the direct payroll is subject to Kentucky taxes and most of the indirect impact accrues to Tennessee firms and workers.
Next, we examine the impact of 1,000 civilian jobs around the state. Currently, most civilian jobs are in the Louisville, Hopkinsville, and Lexington areas; nevertheless, we estimate the impact in all eight economic regions. Figure 4 summarizes our estimates. Areas with the largest impacts are those where the economic region is dominated by activity in Kentucky counties, as opposed to those in bordering states. For example, 1,000 new civilian jobs in the Louisville-Southern Indiana economic region lead to a total of about 1,400 jobs and $28 million in payroll within the area, and about $1.7 million in new state tax receipts.
Figure 4: Annual Military Spending in Kentucky by Region
We also investigated the likely impact of changes in Kentucky’s military retiree population. Again, the Kentucky impact is greatest for retirement in the Louisville, Lexington, and Paducah regions. Our estimates should be considered lower bounds on the true, unknown, economic impact of military retirees. We are assuming that annual retirement income per retiree is but $13,000 and that only 80 percent of that is spent in the local region. In fact, military retirees bring with them substantial financial and human capital that may be more important than their pension income. They often take new jobs in the community, pay property taxes on their home and vehicles, and take leadership positions in the community. We do not have sufficient profile information on retirees to make estimates of these impacts, however.
Finally, we examine the impact of contract activity. There are hundreds of possible scenarios to examine but we consider two. We estimate the impact of an additional $10 million in Naval gun work at the Greater Louisville Technology Park and a comparable contract to perform aircraft modification in the Lexington market. A total of 219 new jobs in Kentucky are created under the Louisville scenario, generating an additional $7.3 million in payroll for workers here and more than $400,000 in state income and sales tax receipts. Similarly, the Lexington contract generates 118 new Kentucky jobs, $4 million in payroll, and about $240,000 in state income and sales tax receipts.
We have recently studied U.S. Department of Defense (DOD) policy and plans, and have analyzed the strengths, weaknesses, opportunities, and threats of all major military installations and programs in Kentucky. We are making recommendations to the Kentucky Commission on Military Affairs as to key actions that state government should take to protect and enhance the economic value of military activity.
Information systems, training, logistics, speed, and precision are the hot areas for investment by the Department of Defense. New dollars will likely flow to Fort Campbell, Fort Knox, and Blue Grass Army Depot for modernization; however, the new more capable systems may require fewer people to operate them.
A major public-private competition is underway for over 200,000 civilian and military positions, with a projected cost savings of 25 percent. Also, DOD seeks to privatize all economically attractive utility systems within the next two years. This should create economic opportunities in communities around major installations.
DOD is seeking to reduce excess infrastructure, partially as a way to generate funds for force modernization by reducing operations and maintenance costs. Two additional rounds of BRAC are scheduled: in 2001 and 2005.
DOD’s current intent is to reduce the total Army Reserve component by 45,000 personnel.
All of the major Kentucky installations scored at or above the median of their categories during the 1995 BRAC round. Scores on a few key criteria prevented the installations from obtaining the highest rating (and therefore the most immunity from base closure scrutiny). Taking into account actions during the past few years, any near-term threat of base closure would likely arise from (a) insufficient maneuver acres at Fort Campbell or (b) a shortage of permanent general instruction facilities and high operations cost per capita at Fort Knox.
Other weaknesses identified for Kentucky assets and programs include (a) increasingly severe land use compatibility problems at Fort Campbell, particularly the problem of commercial development around the interstate highway interchange on the airfield approach; (b) “dangerous” conditions at the Fort Campbell Sabre Heliport.
Several threats exist on the horizon for Kentucky defense activities. The National Guard is taking the brunt of required reductions in reserve personnel nationally, and Kentucky could see significant changes in unit missions and losses in funding. Also, future BRAC rounds or programmatic action may pick up on the BRAC 1991 recommendation to reorganize the Army Corps of Engineers, with a likely closure and realignment of selected district headquarters.
Many opportunities exist for Kentucky to improve the economic value of DOD functions in the state, including:
Assist the Army in obtaining attractive offers from the private sector, particularly from small local firms, to deliver support and to own and operate housing at Fort Campbell and Fort Knox. Kentucky should help conduct training sessions on federal acquisition procedures.
Lead efforts to create economic development opportunities in the local communities surrounding Forts Knox and Campbell and Blue Grass Army Depot by working out joint usage of airfields, rail spurs, and highway infrastructure in ways that resolve land use issues.
Promote local repair service to the Apache helicopters at Fort Campbell (and the Comanche helicopter if purchased).
Build consensus and communicate to DOD leadership that Fort Knox and BGAD have the physical and environmental capacity to host additional missions and tenants.
Evaluate cost-effectiveness of moving the Army’s Recruiting School from Fort Jackson, S.C., to Fort Knox; if findings are positive, promote within DOD. Similarly, a case may be made to consolidate the logistical support functions for recruiting by the joint services (Army, Navy, Air Force, Marines) at Fort Knox.
Aggressively pursue disposal and demilitarization projects for conventional munitions and alternatives to incineration of chemical weapons at BGAD.
Develop a state-level education subsidy program for Reserve personnel similar to that for Guardsmen to help attract those leaving active duty at Fort Knox and Fort Campbell, making the 100th Division even more attractive.
Develop a real estate center of excellence at Louisville’s Army Corps of Engineers district office. The local Corps office has exceptional experience in installation real estate matters, and could become a center of expertise for creative management of DOD real property assets.
New defense contracting business at Technology Park of Greater Louisville as the Services modernize equipment and forces over the next 10 to 15 years. Kentucky agencies could help in marketing and in obtaining grants for infrastructure improvements.
The state should help lure defense established research and development contractors to Kentucky, ideally to be located at Bluegrass Station and Technology Park. Fruitful research niches include support for the Armor Center at Fort Knox and the Special Operations Forces at Fort Campbell.
As a way of improving Kentucky’s general attractiveness for military personnel, the state should more aggressively offer flexible and portable education programs for active duty, civilian, family, and reserve members. Most military personnel need increased formal education, but their mobility makes program delivery, consistency, and certification a challenging issue worldwide.
Promote and financially assist community partnerships to enhance active military installation operations in Kentucky.
Work within federal agencies to obtain more programs and funding for veterans.
The military is the largest employer among organizations that could operate outside Kentucky. Military spending directly accounts for over $3 billion annually in the state, through direct payrolls to soldiers and civilians, through retirement and veterans’ benefits, and through contracts with companies around the state. Major changes in defense spending have left Kentucky with fewer armed forces, but still with a major military presence compared to most other states. Further cuts and realignments seem inevitable. We have developed a simple method for estimating the regional impacts of changes in military spending in Kentucky. The method takes account of the way the state boundary crosses the many economic markets in and around Kentucky. It can be used to make consistent estimates of the economic and fiscal impact of site-specific changes in the deployment of soldiers, civilian staffing, military retirement location, and defense contracts.
Finally, we have identified a number of strategic issues that need to be addressed at the state and local level in Kentucky. National defense policy emphasizes continued force modernization and cost cutting. Kentucky installations need help in privatizing utilities and working out better land use locally. Kentucky businesses have opportunities to capture a bigger share of housing, maintenance, logistics, and research functions. And more flexible and portable education programs need to be developed to help lure more armed services personnel and dischargees to Kentucky.
Kentucky Revenue Cabinet, Statistical Report, various years.
Coomes, Paul and John Vahaly, “The Economic Importance of Military Activity in Kentucky,” Kentucky Journal of Economics and Business, Volume 17, 1998, pages 99–125.
O’Conner, Frank and James Payne, The Economic Impact of Military Activities in Kentucky, Eastern Kentucky University; for the Kentucky Cabinet for Economic Development and the Kentucky Military Affairs Commission, December 1993, 15 pages.
U.S. Army Armour Center, Command Data Summary, Fort Knox, Kentucky, January 1997, 25 pages.
U.S. Department of Commerce, Regional Economic Information System, 1969-95, Bureau of Economic Analysis, August 1997, compact disc data product.
U.S. Department of Commerce, Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II), Bureau of Economic Analysis, 3rd edition, March 1997, 63 pages.
U.S. Department of Defense, Atlas/Data Abstract for the United States and Selected Areas, Washington Headquarters Services, Directorate for Information, Operations and Reports (DIOR), various years.
U.S. Department of Defense, Distribution of Personnel by State and Selected Locations, Directorate for Information, Operations and Reports (DIOR), various years.
Yaeger, Mary and Donna Cantrell, The Impact of Reductions in Defense Spending on the Kentucky Economy, Kentucky Legislative Research Commission Research Report No. 252, December 1990, 99 pages.
* Paul Coomes is Associate Professor of Economics and National City Research Fellow at the University of Louisville. Much of this text is taken from an article by Coomes and John Vahaly in the 1998 volume of the Kentucky Journal of Economics and Business. Findings about the national defense policy and strategic issues in Kentucky were developed with William Harvey, President of the Survivors’ Group, and Norman Morton, University of Louisville. The authors gratefully acknowledge the expert assistance of Barry Kornstein, senior research associate, and Raj Narang and Teresa Lipscomb, graduate research assistants. Return to text.
Of course, these military dollars spent in Kentucky come primarily from individual federal income tax collections, a portion of which are collected from Kentucky residents. The reduced disposable income of Kentucky residents has a negative impact on local economies.
One could calculate an annual net figure by subtracting Kentucky tax payments that go to support federal military activity from the military expenditures in Kentucky. The difference is another measure of the direct economic impact of the military in Kentucky—and one to which economic multipliers could be applied. Return to text.