A safe harbor … for now

In these rough economic seas, more and more vendors are turning to the government market to stay afloat. It’s not hard to understand why: The most recent spending statistics show that the government is virtually recessionproof.

According to the research firm Global Insight and GovPro.com, government agencies at the local, state, federal and special-district levels in the United States will spend $2.84 trillion on goods and services in 2008 – up from $2.74 trillion in 2007.

Estimates provided by St. Louis-based Macroeconomic Advisers mirror those numbers: The forecasting service has predicted that government purchases of goods and services will climb to $2.98 trillion in 2009, which is a 5.67 percent increase over 2008 estimates. Total government purchases for 2008 should reach $2.82 trillion, up from $2.61 trillion in 2007, according to Macroeconomic Advisers.

In its “2008 Onvia Government Procurement Outlook,” the Seattle-based market intelligence firm Onvia found that 80 percent of government purchasing officials plan to maintain or increase spending activity in 2008 compared to 2007. The January 2008 survey polled 1,400 local and state government and education purchasing officials across the United States.

Even so, there’s reason to believe that government agencies – particularly at the state level – are facing some uncertainty in their fiscal futures. More than a quarter (28 percent) of respondents to a GovPro.com online poll indicated that budget and fiscal concerns are keeping them awake at night.

“As the national economy continues to be buffeted by the storms of the housing slump, credit crunch and energy hikes, most state governments are valiantly trying to bridge shortfalls that have appeared in their current (fiscal year 2008) budgets and enact balanced budgets for the upcoming year (fiscal year 2009),” said Sujit CanagaRetna, who is senior fiscal analyst for the Council of State Governments (CSG). Headquartered in Lexington, Ky., the CSG helps states share resources, ideas and strategies to identify the best new approaches to significant state problems.

CanagaRetna told GovPro.com that about a third of the states are facing deficits in their fiscal year 2008 budgets, while almost half are contending with shortfalls in their fiscal year 2009 budgets.

“While the energy-producing states are experiencing flush times, other states – including Arizona, California, Florida and Nevada – face significant problems related to the fallout from the housing collapse,” CanagaRetna said.

States have some ‘cushion’

CanagaRetna noted that some economists predict slightly more robust growth in the U.S. economy in the second half of 2008.

“States, already plagued with sizable health care, education, pension, transportation and emergency management expenditures, will continue to deal with these challenging economic times and look to improvements in 2009 and 2010,” he asserted.

Elizabeth McNichol, who is a senior fellow at the Washington, D.C.-based Center on Budget and Policy Priorities, explained that most states are well-armed for an economic downturn, at least in the short term.

“State spending growth has slowed significantly compared to last year and is way lower when compared to the years prior to last year when the states were making up for lost ground after the last recession,” McNichol said. “State governments did build up their rainy-day funds and their reserves to a level a little bit higher than when they were going into the last recession, so they have that cushion for at least the beginning of this downturn. So they have some reserves they can draw on.”

‘Creative solutions’

Difficulties in the housing market will have an impact on governments’ fiscal condition, predicted Kim Reuben, who is a senior research associate at the Urban Institute, a Washington, D.C.-based organization that conducts policy research and promotes public debate on national priorities.

However, Reuben added, “Local budgets will probably not feel the full brunt of the housing downturn for another year or so.”

“Concerns are high for cities and metro areas facing a lot of subprime foreclosures,” Reuben said. “It’s important to note that while some states and regions are estimating weakening revenues, other states – especially those more reliant on natural resources and extraction taxes – are still pretty strong.”

And even for those local and state governments that are struggling, Reuben sees a silver lining in these difficult times.

“The one positive part of the current economic conditions might be that there are some creative solutions being proposed by different local (and state) governments whereby foreclosed properties are being bought or taken over and made into either affordable rental units or resold to residents or government employees – teachers, policemen, firemen – who might not have been able to afford to live in certain communities,” she said in an e-mail.

Limited federal-spending growth

Federal government spending legislation will be fairly limited, predicted Brian Riedl, who is a senior federal budget analyst at the Heritage Foundation, a Washington, D.C.-based conservative think tank.

“Beyond the supplemental appropriations bill that’s being drafted, I’m not seeing any additional legislation on appropriations until the election,” Riedl said. “It’s going to be pretty quiet for the remainder of 2008.”

It’s likely that Congress will approve continuing resolutions to keep federal agencies operating at current spending levels from October until January 2009, Riedl added.

One marketer who expects sales to government to remain strong for the balance of 2008 is Bren Davis, an account executive for Tempe, Ariz.-based Insight Public Sector.

“Cities, counties and other governments that aren’t as dependent on sales and income taxes will have more dollars to spend,” Davis predicted. His company is a provider of 300,000 computing products, software and IT services to many public-sector clients and other organizations in 170 countries.

Tom Igou, who is the director of state and local government sales at Autodesk, a San Rafael, Calif.-based developer of AutoCAD software and other products, has observed state and local agencies “that build and manage our nation’s roads looking for ways to do more with less.”

“There is a keen focus on three key areas: shortening the time between project approval and the letting of bids, reducing errors and omissions to speed construction and reduce the amount of rework, and the desire to reuse data from pre-design through construction and into operations and maintenance,” Igou told GovPro.com. “These trends were anticipated by Autodesk, and our model-based civil engineering design software (AutoCAD Civil 3D), as well as our construction and visualization offerings, are having an impact on solving these issues.”

Higher fuel prices are impacting government budgets everywhere. In Smith County, Texas, fuel costs are up 184 percent over the last five years, and the county is facing a $500,000 shortfall in its fuel budget this year. Meanwhile, in Oakland County, Mich., the sheriff’s department is considering switching patrol cars from eight-cylinder vehicles to six-cylinder vehicles to reduce fuel consumption.

In 2008, government agencies across the country have been adjusting their budget and spending plans to compensate for higher fuel prices and other economic turbulence. Come this fall, those agencies may have to make further adjustments based on the results of the presidential election.

About the author

Michael Keating is senior editor for Government Product News and Government Procurement magazines. Keating has written articles on the government market for nearly 100 publications, including USA Today, Sanitary Maintenance, Industry Week and the Costco Connection.