2008 Keating Report: The votes are in!
As we move toward the November 2008 elections, public officials and policy analysts are predicting a robust course for government budgets and spending.
The ticket to fiscal prosperity may be marked by some uncertainty and economic detours along the way. However, by the time voters elect a new U.S. president, forecasts indicate that 2008 will turn out to be a solid year.
Highway expansions and maintenance, public-safety building construction and homeland security all will see boosts in their budgets during 2008. In addition, new technology applications in government, including state-of-the-art voting tabulating tools, will receive ringing endorsements this election year.
For a quick overview of the budget consensus, Government Product News conducted an informal, exclusive poll on GovPro.com. We asked online visitors how the 2008 budget of their agency or department was shaping up, compared to their 2007 budget. To date, their responses were as follows:
- Higher than last year’s—48 percent.
- Lower than last year’s—28 percent.
- About the same—24 percent.
Go to http://www.govpro.com to cast your budget vote, see the latest poll results and find additional budget forecasts throughout the year.
Significant spending will tally up
During 2008, government spending on goods and services is predicted to grow and prosper. Per-capita government consumption expenditures and gross investment (one measure of government purchases per person in the U.S.) will grow $304 between the fourth quarter of 2007 and the fourth quarter of 2008. By the fourth quarter of 2008, government consumption expenditures and gross investment will reach $9,346 per person, Economy.com estimated in an exclusive analysis for Government Product News. This figure is an increase from $9,042 per person, calculated for the fourth quarter of 2007.
What’s more, government purchases of goods and services are trending upward through 2014. As shown on Global Insight’s goods and services chart, figures indicate that federal, state and local purchases will rise steadily. Global Insight provides economic, financial and political trend data covering 200 countries and 170 industries and governments.
Likewise, federal revenues are growing, the Congressional Budget Office reported in its latest budget forecast through 2017. See federal revenue chart for year-by-year figures.
Meanwhile, U.S. Communities, which provides a national purchasing forum for local and state governments and many other public agencies, is seeing a high demand among cities, counties and schools for a variety of items. One such item involves upgrades for sports fields.
“We will be awarding an artificial-turf contract in the next 30 days,” explained Kevin Juhring, national program manager of U.S. Communities. “This will be followed by an athletic/stadium lighting solicitation and award. The turf-field category is a major and growing trend across the country, with some agencies having budgeted for as many as 100 fields over the next five years at a cost of between $500,000 to more than $1 million each. Lighting, which is necessary to make turf economically desirable, adds another $100,000 to $200,000 to the cost of each field.
“Our other focus for 2008 is ‘green’ purchasing,” Juhring added. “We have created a Go Green program—details can be found at http://www.gogreencommunities.org. Procurement professionals across the country are being handed green mandates by elected officials. U.S. Communities is not only looking to provide new green contracts, we are greening our existing offerings. Most of our current suppliers have significant green offerings. For example, in 2007 our Office and School Supply contract had green sales over $85 million.”
Juhring also added that U.S. Communities is considering solicitations in 2008 for the following products and services:
- Audio-visual and consumer electronics. “There’s high demand in K-12 education [for this equipment],” Juhring noted.
- Elevator sales, repair and service, including escalators and moving walkways.
- Transit buses, both hybrid and diesel-powered.
- Alternative energy.
- Mobile offices and classrooms.
However, although government purchases and spending remain significant, their growth rates in selected commodities might be slowing a bit. For instance, Seattle-based Onvia, which specializes in government business intelligence, reports that growth has slowed from double-digit rates in the following categories for local, state and federal purchases, based on activity levels:
- Alternate fuels.
- Financial services.
“Growth trends have flattened over the last 12 months with additional correction likely, given across-the-board budget challenges stemming from reduced revenues,” predicted Michael Balsam, Onvia’s vice president of products and services.
Onvia’s Dominion database tracks government sales information that companies can consult to discover sales opportunities. The company’s 9,000 clients represent a variety of industries.
States pursue wealth of primary revenue sources
Forecasts indicate that 2008 will be a time of transition, not just for officeholders up for election, but also for state government budgets.
Good news was included in the “Fiscal Survey of States,” issued in December 2007 by the National Association of State Budget Officers (NASBO) and the National Governors Association (NGA). The report noted that “State fiscal conditions remained strong for most states in fiscal 2007, but overall growth slowed slightly from the robust conditions of fiscal year 2006. Revenues were generally stable and only one state was forced to make mid-year budget cuts.”
For fiscal 2008, the report explained that state spending is budgeted to grow at a rate of 4.7 percent. In fiscal 2007, state general-fund spending grew at a rate of 9.3 percent, which was significantly higher than the spending growth-rate average over the past 30 years of 6.4 percent. This high rate of growth is the result of states using surpluses achieved in recent years to bolster spending on programs that experienced budget cuts in the last fiscal downturn.
In fiscal 2007, most states’ revenue collections exceeded expectations, the NASBO/NGA report noted. Revenues, in fact, exceeded expectations in 38 states.
“Fiscal 2007 tax collections of sales, personal income and corporate income taxes were 5.6 percent higher than fiscal 2006 collections,” according to the report, which added that “states have budgeted for more moderate revenue growth in their fiscal 2008 budgets.”
Both NASBO and the NGA are headquartered in Washington, D.C., and additional budget forecasts can be found on their respective Web sites.
On another note, 2008 could offer some budgetary surprises. “National economic trends have a huge impact on state finances,” said Sujit M. CanagaRetna, senior fiscal analyst for the Council of State Governments (CSG). Headquartered in Lexington, Ky., the CSG is an association that helps states share resources, ideas and strategies to identify the best new approaches to significant state problems.
“Though states are in considerably better financial shape than earlier this decade, when they faced their worst financial downturn in 60 years, there are ominous signs that point to another economic downturn,” CanagaRetna added. “Current state revenues lag long-term historical trends, and a number of states are already signaling the onset of budget shortfalls. States continue to face rising expenditures for health care, education, retirement systems, corrections, transportation, emergency management and infrastructure. In 2008, states will confront the combined pressure of dealing with these expenditure categories and the fallout from the contracting national economy.”
Legislative bottlenecks in Congress, coupled with the uncertain economy, cause concerns for Kim Reuben, a senior research associate at the Urban Institute. The Washington, D.C.-based Urban Institute conducts policy research and promotes sound social policy and public debate on national priorities.
“I’m less optimistic about state budgets in 2008,” Reuben said. “I do think that there’s going to be a fallout from what’s going on now both on Wall Street and with the housing market in general. So how that’s going to trickle down to the states, and how states are going to make decisions about issues like health care, when the federal government is sending very mixed signals, remains to be seen.”
To ride out the fiscal turbulence of the housing market and counteract Congress’ lengthy process for making budget decisions, some states are tapping into new revenue sources. For fiscal 2008, various states have enacted a variety of revenue generators, including hikes in cigarette and tobacco taxes, corporate income taxes and fees and motor-fuel taxes, according to the NASBO/NGA “Fiscal Survey of States” report.
In New York state, Gov. Eliot Spitzer, when faced with a $4.3 billion budget deficit in 2008, thought briefly about requiring Amazon.com and other online retailers to charge state and local sales taxes on all purchases from New York. By assessing these taxes, the state could collect tens of millions of dollars in lost revenue from unreported taxes via New Yorkers who shop at out-of-state online retailers, including Amazon.com.
Although Spitzer backed down on his plan to tax online retailers, other groups are working in a similar direction. The Governing Board of the Streamlined Sales and Use Tax Agreement, which is a multi-state group working to collect sales taxes on Internet and other purchases delivered from out of state, is working to expand its current 15-state roster to at least 20 states by 2010.
Local governments confront lengthy slate of budget priorities
Numerous sources, from think tanks to trade groups, say cities and counties were fiscally healthy in 2007, but that 2008 may bring some tightness in each jurisdiction’s budget.
According to the “City Fiscal Conditions in 2007” report issued by the National League of Cities (NLC), seven in 10 city finance officers said that their cities were better able to meet fiscal needs during 2007 than in the previous year.
Cities have seen their revenues grow: General-fund revenues in 2006 were 6.6 percent higher than 2005 levels, and at the close of 2007, city finance officers were expecting revenue growth to reach 3.6 percent over 2006 levels.
The picture for 2008 is less optimistic, with those same city officials in the NLC survey predicting a slowdown in revenues and increased spending pressures. Concerns about the health of real estate markets and their potential impacts on property tax revenues, combined with increased calls for property tax relief from homeowners, may cloud the picture in 2008.
Inflation also is impacting municipal budgets. “The purchasing power of cities and towns is under tremendous pressure—with increasing costs for such staples as public safety and infrastructure, as well as increases in health insurance and pensions for public employees,” said NLC Executive Director Donald Borut. “Cities are doing the people’s business—getting commuters to work, picking up the trash, keeping libraries open, making sure their streets are safe. And city leaders are being innovators. But it’s getting more difficult every year in the face of increased demands for more services from their constituents.”
Health care and pension costs, in particular, are increasing at a faster rate than city revenues. The NLC 2007 report found that when adjusted for inflation, city revenues grew only 1.1 percent from 2005 to 2006, while expenditures grew by 1.2 percent.
To boost revenues in 2008, nearly half (45 percent) of all responding city finance officers in the NLC survey reported that they have increased fees and charges for services. Twenty-nine percent reported that their respective city opted for increasing property tax rates, while 17 percent reported reducing property tax rates. The NLC survey noted that cities have been less likely to increase sales- or income-tax rates.
On the spending side, three in four city finance officers reported increases in public safety spending in 2007, while 59 percent have boosted spending for infrastructure or capital projects. About 52 percent of respondents to the NLC 2007 survey said they are increasing the growth rate in their operating budgets to support a variety of new and existing services, and 39 percent reported increases in human services spending.
At a National Association of Counties (NACo) Corporate Forum held last October, county officials echoed some of the same areas of concern for 2008 as city finance officials noted in the NLC survey, including:
- Increased costs of health insurance.
- Increased exposure on post-employment health and other insurance benefits.
- A likely increase in spending for technology products and solutions.
- Increased attention to the coming knowledge drain by the retirement of an estimated 40 percent of the work force within four years.
- Increased spending on security, including homeland security operations.
In California, the state’s 2008-2009 budget, when approved, will have a big impact on Golden State counties.
“Many of the programs and services that counties provide are in partnership with the state of California, and when funds are reduced for those areas, counties are either forced to cut back those services or provide funding of their own to ensure that those services are maintained,” said Jean Hurst, who is legislative representative for revenue and taxation for the California State Association of Counties in Sacramento, Calif. “I think that while there are certain areas of the state that are managing, overall, it’s a pretty grim outlook.”
New initiatives become likely candidates for federal adoption
According to budget expert Alan Viard, resident scholar at the American Enterprise Institute (AEI): “Federal spending on defense will remain high during the upcoming year. As in most past years, there will be increases in federal health spending (Medicare and Medicaid).”
Viard also predicted that the following three appropriations bills are the most likely to post the sharpest percentage increases in fiscal year 2008: the Energy and Water bill; the Military Construction and Veterans’ Affairs bill; and the Transportation and Housing and Urban Development bill.
The AEI is a private, nonpartisan institution dedicated to research and education on issues affecting government, politics, economics and social welfare.
“The year 2008 offers a mixed picture—it’s not a year with a lot of clarity,” Nick Johnson told Government Product News. Johnson is director of the State Fiscal Project at the Center on Budget and Policy Priorities in Washington D.C. The center conducts research at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals.
“As usual, I think education and health care will be the spending drivers,” Johnson added. “An area of uncertainty, I think, is environmental and climate-change-related initiatives of all sorts. It’s very unclear whether this will be a major area of state focus or whether the federal government will end up taking the lead. Cap-and-trade initiatives offer the prospect of new revenue streams to finance these kinds of initiatives, but it’s too soon to tell exactly what they’ll look like—probably not much for 2008, but maybe 2009.”
With cap-and-trade programs for greenhouse gases, emissions are capped, and businesses are permitted to trade credits to emit carbon dioxide and other heat-trapping gases.
In 2008, federal revenues and deficits are headed in opposite directions. Federal revenues are growing (see federal revenue chart), the Congressional Budget Office reported in its latest budget forecast through 2017. The goods and services chart also shows that federal purchases of goods and services are projected to increase in the years ahead.
Cato Institute, which is a nonprofit public policy research foundation headquartered in Washington, D.C.
Federal deficits, meanwhile, are shrinking, noted Chris Edwards, director of tax policy studies at the
“The deficit has fallen dramatically and continues to fall,” Edwards told Government Product News. “The final year-end numbers for FY 2007 showed that the federal deficit was down to $163 billion, which, as a share of the economy, is actually fairly low. The federal deficit is falling dramatically, and taxpayers should be celebrating. It will make it more difficult for Congress to impose new tax increases.”
In his recent “Tax and Budget Bulletin—Improving on the President’s 2008 Budget,” Edwards urged federal budget administrators to consider curbing compensation for federal employees. “Pay and benefits for federal workers have been rising much faster than for private workers. Substantial savings would accrue from skipping the usual annual pay adjustments for two years.”
Innovative information technology receives a unanimous ‘thumbs up’
As we move toward crucial 2008 elections, governments at all levels continue to embrace new information technology (IT) that increases the efficiency of important public processes. For instance, the San Francisco Board of Supervisors committee has given preliminary approval to buy newer voting machine technology for reading ballots.
The new machines, made by Sequoia Voting Systems of Oakland, Calif., promise to read lighter shades of ink on absentee ballots. Because the current equipment in use can only read darker shades, absentee ballots marked in lighter colors often were not properly read or counted in past elections. Value of the proposed contract is $12.6 million.
In a different Oakland jurisdiction—Oakland County, Mich.—IT administrators are relying on project portfolio management (PPM) software to improve governance. Developed by Islandia, N.Y.-based CA Clarity, the PPM package is helping the county’s IT operations work more effectively and better align these operations with Oakland County’s business and economic development goals.
“Return on Investment (ROI) is what drives all of our decisions in the IT world today, and even though we are a government agency, we still have to look at tangible and intangible benefits to drive projects forward,” said Phil Bertolini, deputy county executive and CIO for Oakland County. “In many cases, projects will be prioritized based on their ability to return back the investment to the taxpayers, and CA Clarity’s financial billing and project budget processing modules will help us in that regard.”
In another move to enhance operational efficiency and responsiveness, five departments in the city of Hampton, Va., soon will be using Strategy Management application software developed by SAP Public Services Inc. The installation of the IT product, which will be handled by Cipher Business Solutions LLC, is part of the city’s efforts to better define, measure and manage the effectiveness of operations, public service programs and projects for its 146,400 citizens.
“We needed a system that would improve information sharing and collaboration between city departments and promote the visibility of critical performance and program information,” said John Eagle, assistant city manager for the city of Hampton.
City officials selected SAP over nine other software vendors in a competitive process. According to Eagle, “SAP understood our goal, showed us a roadmap for achieving it and offered a full complement of services to make it happen.”
The city will use the new software to quantify performance in critical areas, such as its 3-1-1 services center and municipal and public works programs. According to SAP Public Services, the software will allow Hampton to track 3-1-1 call-abandon rates and wait times as well as view productivity and capacity levels for municipal problems such as clogged storm drains and nonworking traffic lights.
In addition, the software will help maintain critical institutional knowledge, especially for long-term projects. Goals are to avoid the negative impact of a retiring work force and employee turnover, according to SAP Public Services.
Governments buy full roster of technologies and products
Various indicators that reflect the importance of government purchases and the overall government market are outlined by the Freedonia Group, a market research firm headquartered in Cleveland, Ohio:
- Almost 25 percent of bearings used in maintenance and repair projects are bought by governments, reported a recent Freedonia study. The government market for bearings is projected to rise at a 2.4 percent annual pace through 2011 to $450 million. Sales of bearings to government will continue to be spurred by increases in defense expenditures.
- Demand for electric transmission and distribution equipment in government and institutional markets will increase 4.8 percent annually to $700 million in 2011. Switchgear, transformers, hardware and meters are a few of the products found in this category. Growth in government purchases will be supported by increases in transportation construction spending and government fixed investments.
- Government and institutional demand for electric transmission and distribution equipment, said Freedonia, is affected by the level of government investment in infrastructure, which includes highway and maintenance needs, along with new construction and maintenance of public educational and health care facilities as well as other government buildings.
- Demand for rechargeable batteries used in government applications is expected to increase 4.6 percent annually through 2011 to $738 million. Governments, estimated Freedonia, buy more than 8 percent of the rechargeables used in the U.S., based on the value of those rechargeables. In the future, rechargeable power supplies in the government arena will face increased competition from alternative-energy source technologies, such as fuel cells. Military, homeland security and emergency-disaster preparedness agencies (at all levels of government) are major customers for these power supplies.
- Demand for powered lawn and garden equipment in the government and institutional market is forecast to increase 3.4 percent per year to $580 million in 2011—up from $490 million in 2006. By 2016, governments and institutions will be spending an estimated $650 million annually for this equipment.
Growth will be aided by continued increases in the construction of various institutional buildings, where the installation of new lawns and gardens is typically a part of new construction. In addition, these new buildings will provide lawn and garden maintenance opportunities in the long-term. Government and institutional markets for lawn and garden supplies include military bases, schools, parks, hospitals, correctional facilities and roadsides.
Government agencies purchase a wide range of landscaping equipment, such as tractors, hydraulically powered riding mowers, boom-mounted and zero-turning-radius mowers, chipper/shredders, leaf blowers, replacement parts and attachments.
Proactive campaigns drive fleets
Currently, more than 4 million vehicles are owned by governments in the U.S. About 3.6 million of these vehicles are owned by state, county and municipal governments, and almost half a million are owned by federal agencies.
Throughout all levels of government, fleet managers are taking steps to enhance vehicle efficiency and reduce costs. For instance, governments increasingly are replacing traditional gas-powered vehicles with hybrids or other alternative-fuel vehicles. In Missouri alone, the state government fleet currently has 14 hybrid-electric vehicles and 1,032 E85 fuel-conserving vehicles.
Missouri Gov. Matt Blunt recently announced that some state agencies in his jurisdiction are leasing the Ford E85 Escape Hybrid, which is said to be the world’s first hybrid vehicle capable of operating on fuel blends containing as much as 85 percent ethanol.
“Our state is doing our part to look for alternative fuels to help lessen America’s dependence on foreign oil,” Blunt said. “The more clean-burning, renewable fuel Missouri produces and uses, the better off we will all be in the long-term.”
Like other hybrids, the Ford E85 Escape Hybrid can switch automatically between pure electric power, pure fuel power or a combination of the two. The E85 Escape produces about 25 percent fewer greenhouse gas emissions than a gasoline-fueled Escape Hybrid.
Blunt has taken other steps to make the “Show-Me State” an earth-friendly state. In addition to signing a 10 percent ethanol standard for the state, he has directed that 70 percent of any new vehicles bought or leased by state government agencies have flex-fuel capabilities.
One Missouri native and fleet executive who offers expert advice about hybrids in government is Christopher Amos, CAFM. Besides serving as commissioner of equipment services for the city of St. Louis, Amos is senior vice president of the National Association of Fleet Administrators (NAFA). Headquartered in Princeton, N.J., the NAFA is a membership-based organization that has served fleet management professionals for the past 50 years.
“There has definitely been a trend toward adding hybrids in government fleets over the past three to four years, and that momentum is building,” Amos told Government Product News. “Just like individuals, fleet managers have to be aware that current hybrid-electric technology is not a good fit for every application and pattern of use—hybrids are not a ‘silver bullet’ for combating high fuel prices. However, some fleets have found them to be a good fit—that is, high-mileage use in urban stop-and-go traffic—and are expecting a sufficient savings in fuel to more than offset the higher incremental cost of the hybrid vehicle for a lower life-cycle cost.”
New truck technology will aid government fleet conservation efforts, Amos added. “Probably the most exciting hybrid news for government fleets is that the medium- and heavy-duty truck systems from International/Eaton and other manufacturers are going mainstream and should be available this year in greater numbers,” he said. “Many fleets, including my own, will be giving them a try in applications like the aerial truck design, where the hybrid-electric system can cut the engine idle time and cost by running the power take-off hydraulic pump off the battery instead of off the diesel engine. This is a sweet system, and we all owe thanks to the Hybrid Truck Utility Forum for getting this design to market.”
Amos noted a few other steps that government fleet managers are taking to reduce the impact of higher fuel prices:
- Implementing and enforcing anti-idle rules. “Advances in diesel engine technology no longer make it necessary to leave trucks idling just so they will restart in most of the country, even in the winter.”
- Paying more attention to proper tire inflation. “This maintenance step reduces rolling resistance and improves fuel efficiency—not to mention improving safety and tire life.”
- Relying on GPS systems. “There is a big upsurge in interest and implementation of GPS-enabled telematics systems in fleets,” he added. “The implementation of telematics systems by some fleet management companies means that even those fleets leasing vehicles can get access to information generated by this valuable technology.”
- Buying smaller vehicles when possible. “Fleets, however, can get bitten when they downsize cargo handling trucks and vans too much. Operations managers and drivers have a tendency to overload these types of units, thinking that if it physically fits, then the vehicle was designed to carry it.”