Government to the rescue

The 2009 Keating Report comes to you amid a backdrop of bailouts and proposed stimulus packages — and unprecedented pressure on the government to resuscitate the nation’s critically wounded economy.

Regardless of how it happens, here’s hoping the economy bounces back to solvency and strength in 2009. If that happens, consumers will start spending again, bankers will start lending and U.S. businesses can start hiring instead of downsizing workers.

A healthy economy, in turn, could help boost government revenue, assuring public agencies of having needed funds to maintain essential services, upgrade equipment, improve our nation’s infrastructure and continue meeting employee payrolls.

Here’s a look at experts’ projections for government spending at the federal, state and local levels, along with insight into some spending trends in areas such as highway maintenance and private security. While some of the news — particularly for states — is grim, there’s a common theme among experts’ commentary: Help, most likely, is on the way. But will it be enough to turn things around?

Federal government

Brian Riedl, a senior federal budget analyst at the Heritage Foundation, foresees a much bigger federal budget in 2009.

“I expect President Obama and the Democratic Congress to significantly hike federal spending, even faster than the 11 percent growth we’ve had in the past year,” Riedl told Government Product News.

Riedl highlighted some of the major spending areas.

“The federal budget automatically increases Social Security, Medicare and Medicaid spending significantly each year. On top of that, President Obama has promised massive spend increases for energy, health care and education as well as stimulus spending that would likely go to infrastructure and anti-poverty programs. That’s where I would expect the bulk of the increases to be.”

With the Obama administration and Congress likely to open the government’s checkbook, Riedl advised agencies at all levels of government to “get your projects in line.”

According to the Congressional Budget Office (CBO), federal revenues will be growing in the years ahead. See CBO’s chart (“Federal revenues: headed upward in the future”) on Page 14.

Federal purchases of goods and services, likewise, are projected to grow fairly steadily. See IHS Global Insight’s chart (“Total government purchases of goods and services, 2002-2015”) on this page. The chart was issued this past November.

State governments

Tough economic times are impacting state budgets, according to Sujit CanagaRetna, senior fiscal analyst for the Council of State Governments (CSG) in Lexington, Ky.

“The outlook for states in 2009 portends more grim news, as an increasing number of states report falling revenue flows across all categories,” CanagaRetna said. “In fact, a vast majority of the states are probably in or will soon face recessionary conditions in their economies. Cumulative state budget shortfalls already amount to tens of billions of dollars in the current fiscal year, and are expected to rise to triple-digit levels in the next.”

Hope, CanagaRetna explained, lies in timely Congressional action.

“The potential for a second federal stimulus package offers the promise of deploying fiscal tools to restore, renovate and renew the nation’s aging and woefully inadequate infrastructure architecture with the added benefit of stimulating state economies in a 21st century New Deal program,” he asserted.

To weather the economic crisis faced in many parts of the country, states will need to be flexible, according to Nick Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities (CBPP) in Washington, D.C.

“Policymakers will need to be open to a range of possible solutions, including raising revenues,” Johnson said. “Quite simply, states that raise taxes will be in a better position to keep budget cuts to reasonable levels.”

Like other experts Government Product News interviewed, Johnson sees help from Congress right around the corner.

“I think it’s very likely Congress will pass a stimulus package in early 2009, barring a miraculous economic turnaround,” Johnson said. “I think it’s likely the package will include flexible funds for state operating budgets that they could, if they chose, use for infrastructure.”

States are taking steps to get their budgets balanced. The National Governors Association’s “State Economic Review” noted that through last November, a total of 18 states had made cuts in their budgets totaling $5.5 billion. Other states, meanwhile, have been re-calculating their budgets, given the recent jump in unemployment and the drop in both income- and sales-tax revenues.

California Gov. Arnold Schwarzenegger wants $4.5 billion in spending cuts, and he proposes to raise $4.7 billion through tax hikes, including a three-year, 1.5-percentage-point increase in the Golden State’s sales tax. Other revenue, said the governor, could come from raising the registration fee for vehicles by $12 and taxing companies that extract oil from California, which Schwarzenegger said would generate $528 million this year. Schwarzenegger also wants to accelerate hundreds of millions of dollars in public works spending to speed job creation.

Local governments

The National League of Cities’ (NLC) latest “City Fiscal Conditions in 2008” report, which was released this past fall, includes some sobering news. The report, which is based on a national mail survey of finance officers in a sample of 1,055 U.S. cities, shows limited revenue growth: current-dollar growth of 2.1 percent from city income-tax receipts, and 1.2 percent current-dollar growth from city sales-tax collections.

On the spending side, three in four (73 percent) city finance officers reported increases in public safety spending in 2008, while 52 percent reported increases in infrastructure/capital spending, and 35 percent reported increases in human service spending. Forty-two percent of survey respondents said that their cities’ general operating spending increased and 33 percent cited increases in spending on the municipal work force.

In the NLC survey, city finance officers also were asked about specific revenue actions their cities have adopted. The most common action taken to boost city revenues during 2008 was to increase the levels of fees for services. Half (49 percent) of the responding city finance officers reported that their city took this step. One in four cities also increased the number of fees (28 percent) or the level of impact and development fees (23 percent).

Columbus, Ohio, for instance, is thinking of charging city residents for garbage pickup. A fee imposed on Columbus’ 327,000 households that rely on the city’s refuse division would generate $49.5 million yearly, according to proponents of the fee. New York City, meanwhile, is thinking of imposing a commuter tax on people who work in the city but live in the suburbs. A new commuter tax could bring in $715 million in 2009 to the Big Apple, according to some estimates.

One positive about current city budgets is that the general-fund ending balance in those budgets is at historically high levels in many cities. These ending balances, often referred to as “reserves,” can help cities cope with future fiscal challenges by providing a financial cushion. Cities often build up healthy balances in anticipation of unpredictable events such as natural disasters and economic downturns.

According to the NLC survey, city finance officers budgeted ending balances for 2008 at just over 24 percent of general-fund expenditures. While still high, that ending balance figure is down from 28 percent in 2007.

Four in five (79 percent) of the city finance officers polled in the NLC survey predicted that their cities will be less able to meet critical community needs in 2009 than in 2008.

“The economic downturn will continue to translate into reduced city revenues, while demand for services and increases in costs will continue to put pressure on the spending side of the ledger,” said the authors of the NLC report.

Can local governments expect more federal aid to help them cope? The answer is “Yes.” At press time, President Obama’s proposed infrastructure funding program, which he first announced in a Dec. 6, 2008, radio address, promised billions to pay for renovations and upgrades of sewer systems, electrical grids, dams, municipal utilities, schools and other local government projects.

Local and regional transit systems, which have $8 billion in projects on the drawing board, according to one estimate, also would benefit. Local transit systems, for instance, would get money to buy hybrid buses and expand light rail systems.

The Obama funding proposal looks to be the biggest public works program since the construction of the interstate highway system in the 1950s. The president’s infrastructure improvement plan could create millions of new jobs and help stem the economic tailspin that started in 2008, if it works as intended.

The 3,000-plus counties in the United States are, likewise, facing some financial distress. In the “State of the County Economy Survey” that was issued this past October, one of the conclusions reached was that “the recent downturn in the national economy is resulting in revenue shortfalls, increased expenses and greater difficulty in routine borrowing in many of the nation’s largest counties.”

The survey, conducted by the National Association of Counties (NACo), reported that among responding counties, “87 percent said they anticipate a revenue shortfall and 27 percent said they expect increased expenses.” Seventeen counties with populations of more than 500,000 residents from 12 states in all regions of the country were surveyed in mid-October by NACo.

One consequence of tighter county budgets is that counties may rely more on cooperative purchasing programs, according to Steve Swendiman, managing director/CEO of the NACo Financial Services Center, and a co-general manager of U.S. Communities.

“You may see declines in purchasing departments in terms of staffing, so they are probably going to resort to more cooperative procurement vehicles where they don’t have to do all of the work to bid something, particularly in commodity lines where it’s low-cost, high-volume stuff like office supplies and furniture,” Swendiman said.

Besides national cooperatives, Swendiman sees regional cooperatives and group buying organizations that are run by councils of government gaining in the process. Local governments, Swendiman said, also will pursue making purchases off of state government contracts where they are permitted.

Governments embracing technology

More than ever, governments are seeking new technology that provides cost-effective solutions. The Iowa Department of Transportation (DOT), for instance, is relying on new materials, according to Norman McDonald, director of Iowa DOT’s Office of Bridges and Structures.

“The recently completed Interstate 235 project in Des Moines gave the Iowa DOT the opportunity to introduce innovative materials such as high-performance concrete (HPC) and self-consolidating concrete (SCC) to Iowa,” McDonald told Government Product News. “The HPC mixes use locally available aggregates to meet new design requirements in terms of strength and permeability.

“Self-consolidating concrete has proven to be an attractive companion for HPC in precast applications, and casting aesthetic features and components with complex geometry. Currently, SCC is being used in casting deck panels, noise walls, aesthetic features, mechanically stabilized earth walls and in some pre-stressed concrete beams.”

The Iowa DOT is pioneering the use of a third concrete mix, according to McDonald.

“Iowa is leading the way introducing an advanced mix known as ultrahigh-performance concrete,” McDonald said. “We have just completed the second bridge in Iowa using this material.”

The Serrano Water District in Orange, Calif., is testing a portable and potable water-treatment system developed by Irvine, Calif.-based Sionix. The Sionix Elixir system uses air bubbles, in the form of dissolved air flotation (DAF) technology, to clean water and removes 99 percent of contaminants without chemical byproducts, according to the company. Through the water treatment, microscopic bubbles adhere to suspended particles in water. The bubbles force the particles to the surface, where they are skimmed off.

Each Sionix system produces a minimum of 225 gallons of fresh potable water per minute, or roughly 325,000 gallons per day, which is enough for a community of about 500 to 600 homes. The company is targeting year-round usage in government as well as uses during emergencies and natural disasters.

The Serrano Water District is testing the Sionix Elixir system at the Villa Park Dam, which is part of a state and county government flood-control system. The company has announced positive interim results in the test, with iron and manganese levels reduced to well below the maximum contaminant levels allowed for drinking water.

The U.S. Navy and Marine Corps, meanwhile, will be using an advanced metering infrastructure (AMI) product to help the military branches comply with energy-reduction requirements mandated by the Energy Policy Act of 2005. One of the partners in the AMI project is Reston, Va.-based KORE Telematics, which will use its network to remotely collect and monitor energy usage data in Navy and Marine Corps buildings worldwide.

KORE is a digital wireless services provider specializing in machine-to-machine communications. The AMI project partners will rely on the KORE network to facilitate measuring and analyzing energy usage at the Navy and Marine installations. The goal: Reduce energy consumption through the strategic allocation of energy resources at military bases and stations.

Everyone would benefit if governments adopted green energy technologies, according to Jigar Shah, founder of SunEdison, a solar company in Beltsville, Md. Shah told Government Product News that if governments led by example and made their own buildings greener, thousands of jobs would be created, and “the net cost could be zero, because it will save so much energy.”

“The next administration could easily implement solar, wind, geothermal and other alternatives for federal energy usage,” Shah said. “The federal government is the country’s largest energy user, so this alone would provide an extraordinary stimulus to the renewable industry.”

Growing demand for …

In spite of the economic hiccups, total government purchases of goods and services are expected to rise over the next few years, according to economists and researchers.

As shown on the chart on Page 15, government will spend $2.95 trillion on goods and services during 2009, according to the projections of IHS Global Insight, a Waltham, Mass.-based research firm. Of this amount, state and local governments will account for about 62.4 percent of total purchases, with federal agencies accounting for 37.6 percent. Overall, purchases of goods and services by governments in the United States may reach $3.40 trillion by 2015.

Governments are major purchasers in a variety of industries, according to data from IBISWorld, a Los Angeles-based industry intelligence firm. Here are a few U.S. industries that count heavily on the government market. The table, constructed from information in IBISWorld’s database, shows the percentage of industry revenue that comes from government purchases, rentals or leasing for each industry:

• Automobile towing — 35 percent.
• Computer and printer leasing — 20 percent.
• Software publishing — 20 percent.
• District steam heating and air conditioning — 15 percent.
• Measuring, testing and navigational instrument manufacturing — 13 percent.
• Alarm, horn and traffic-control equipment manufacturing — 12 percent.
• Forest support services — 12 percent.
• Satellite telecommunications providers — 11 percent.
• Tools, equipment and other rental centers — 8 percent.

Other market researchers, such as the Cleveland-based Freedonia Group, see continued growth in government spending for a variety of products in the years ahead. In its “Industrial and Institutional Cleaning Chemicals to 2012” report (study No. 2396), Freedonia analysts note: “Demand for industrial and institutional cleaning chemicals in government facilities is expected to expand 3.8 percent per annum to $241 million in 2012.”

“Growing public concern related to the transmission of infectious diseases in environments with high population densities, such as overcrowded prisons, will spur demand for anti-microbial cleaning products,” the report states. “In addition, the anthrax scare in the early years of the decade highlighted the vulnerability of government and military facilities to bioterrorist attacks, and has hastened development of new value-added disinfectants and other cleaning products.”

Some of the products most often purchased by public-sector agencies, according to Freedonia’s cleaning chemicals report, include floor maintenance products, general cleaners and disinfectants.

“In floor care, ultrahigh-speed (UHS) floor-burnishing and compatible floor-care products are popular due to the large hard-surface floor spaces (e.g., meeting rooms and wide hallways) found in many military and government buildings, and the aesthetic value of the ‘wet look’ that these machines provide,” the report explains.

Another Freedonia report, “Paint and Coatings to 2012,” (study No. 2386), spotlights increased purchases of selected highway maintenance supplies going forward.

“Demand for road and bridge coatings in the U.S. is forecast to increase 4.4 percent per year to 52 million gallons in 2012, outpacing real (inflation-adjusted) gains in highway and street maintenance and repair expenditures,” the report asserts. “In value terms, demand is expected to expand 5.2 percent annually to $450 million at the same time, based on a shift to more environmentally friendly coatings as well as a moderation in pricing from high 2007 levels.”

According to the report, the demand for road and bridge coatings is being driven by several factors, including safety.

“An increasing emphasis on highway safety has prompted the initiation of higher national standards for road marking reflectivity, which has resulted in more frequent re-striping,” the report explains. “These same efforts have also resulted in wider lines on both the road center and edges.”

The study also notes that the increased focus on road and highway safety has resulted in “more frequent maintenance for applications such as crosswalks and no-drive zones,” while “environmental concerns, such as eliminating lead content, are a driving force in the development of new traffic paint formulations.”

Freedonia’s recent “Private Security Services to 2012” report (study No. 2362), projects growth in the government market for private security services, including those provided at public utilities, military bases, courthouses, prisons, embassies and other government buildings. Demand for security services in this market is projected to increase 4.7 percent per year to $7.6 billion in 2012, according to Freedonia.

Some government installations where Freedonia sees potential growth in the use of contract security services include:

• Publicly run power plants and other utilities facilities, due to concerns about terrorist attacks on nuclear power plants and the public water supply.

• Prison systems, both at the federal and state levels. Freedonia analysts predict: “The high level of overcrowding in prison systems will continue to drive interest in outsourcing the construction and management of prison facilities to private firms.”

• Military installations, federal courthouses and detention facilities. A major vendor in this area, said Freedonia, is “Akal Security, which is a leading provider of security staff for government agencies such as the U.S. Department of the Army, the National Aeronautics and Space Administration, the U.S. Environmental Protection Agency, the U.S. Department of the Interior, the White House Federal Credit Union and a number of federal courthouses.”

Freedonia’s security services report notes that “for several types of government contracts, particularly those that cover guarding sensitive facilities, operators are restricted to companies that are U.S.-owned and operated.”

Government construction: steady as she goes

In its “Construction Outlook 2009” report, New York City-based McGraw-Hill Construction explains that the government and institutional building sector “is generally stable by nature, avoiding the wide swings shown by commercial buildings,” and that is especially true this year. MHC forecasters predict value of construction of commercial buildings, including retail and hotels in the United States, will drop a whopping 17 percent in 2009. By comparison, value of construction of government and institutional buildings will drop a modest 3 percent.

In 2009, government and institutional building projects will cover 485 million square feet, down from 518 million square feet in 2008, according to MHC preliminary estimates. Federal courthouses, convention centers, sports arenas and airport-transportation terminals are some of the government projects covered in this category.

Military construction tied to base realignment and closure is one area of expansion in 2009, according to MHC forecasters.

“For fiscal 2008, the base realignment and closure account was raised 29 percent, while funding for other military construction was lifted 30 percent,” the “Construction Outlook 2009” states. “That support will continue in the near term, as the base realignment and closure account was given another 18 percent increase for fiscal 2009.”

On the education front, MHC forecasters see construction spending in 2009 just 3 percent below 2008 levels for new schools, colleges and other education buildings. Construction and expansion of community colleges and vocational schools, say MHC analysts, showed strong growth through 2008, with both categories showing gains over 20 percent in value of new construction.

Yes, education construction spending may slow a little in 2009. The sagging economy has reduced tax receipts for governments, and that makes it more difficult for them to raise funds through the bond market. The financial rescue plan put in place by the U.S. Treasury and the Federal Reserve in late 2008, however, should help to ease the severity of the situation.

In addition, elementary and high school enrollments will be growing in the years ahead, making school construction and expansion necessary.

“Total public and private elementary and secondary school enrollment reached a record 55 million in fall 2005, representing a 14 percent increase since fall 1992,” said the National Center for Education Statistics in its “Projections of Education Statistics to 2017.” “Between 2005, the last year of actual data, and 2017, a further increase of 10 percent is expected, with increases projected in both public and private schools. Increases in public school enrollment are expected in the Midwest, South and West.”

A busy year for public works?

Value of public works construction in 2009 will reach almost $110 billion in 2009, down from an estimated $114.8 billion in 2008, MHC predicts. Highway and bridge spending accounts for almost half of this amount, with the balance coming from environmental public works and other public works construction. Those numbers, however, could change with the potential passage of a federal stimulus package.

Motorists are driving less and taking other conservation steps (like buying hybrid vehicles). This has led to a reduction in federal gas-tax revenues that flow into the Highway Trust Fund, as well as a projected $3.3 billion shortfall in federal funding of highway construction. Congress will no doubt look for a solution to keep the Highway Trust Fund solvent, as it gears up to replace the current highway funding bill.

Around the United States, there are numerous highway construction projects underway. In Tulsa, Okla., for instance, the first major construction work has started on the effort to widen Interstate 44. Plans call for widening stretches of I-44 from four to six lanes, improving ramps and other upgrades in the $330 million project. Incentives are in place to expedite completion on the 23-month-long work schedule.

“This is the biggest and single most expensive project ever put up for bid by the Oklahoma Department of Transportation,” department Director Gary Ridley said at the project’s start this past November.

In Colorado, two significant projects that are expected to move forward in fiscal 2009 include:

• U.S. 160 Wolf Creek Pass Reconstruction, Phase 4 — The project involves 3,000 feet of highway realignment, minor widening and parking/rest area construction just east of the pass summit. Rock blasting will be employed, according to Colorado Department of Transportation officials. The approximate budget is $8.2 million.

• Interstate 25 through Trinidad, Colo., reconstruction — The project involves four miles of reconstruction of southbound lanes through the city of Trinidad, including the main viaduct, mainline bridges and several entrance and exit ramps. Project cost is approximately $38 million. This is the second phase of reconstruction through Trinidad; currently underway is the reconstruction of the northbound lanes, which will be completed in July at a cost of $37 million.

Meanwhile, work is progressing on Interstate 69 construction in Tennessee. The first segment of I-69 on its new alignment is scheduled to be let for construction in 2009 in Obion County, Tenn. I-69 currently exists to interstate highway design standards from the Michigan-Canada border to the northeast side of Indianapolis.

Environmental public works spending includes construction and repair of sewers, upgrading water supply sources and treatment, and river and harbor development. For 2009, MHC is forecasting that governments will spend a total of $35.2 billion in this category. Congress, may, however, channel additional monies to this activity to pay for rebuilding levees and floodwalls around New Orleans as well as flood-control projects in the Midwest associated with Hurricanes Gustav and Ike. In addition, Congress may authorize additional public works appropriations in 2009 to pay for special funding for disaster relief.

One area of stability in the years ahead is public safety construction, including prison construction, according to Raleigh, N.C.-based market researcher FMI. In its fourth-quarter 2008 “Construction Put in Place” report, FMI sees value of public safety construction hovering around $11 billion annually from 2008 through 2012.

FMI’s forecasters, in their “2009 U.S. Markets Construction Overview,” noted that federal and state prisons continue to have inmate populations in excess of design capacity. Prison administrators, said FMI, will focus their construction spending on secure re-entry beds and rehabilitation tactics.

“The goal,” said FMI, “is to reduce inmate populations by using non-incarceration methods of sentencing such as electronic tracking and supervision, community corrections or rehabilitation and treatment, while also increasing correctional facility beds. Enforcement centers are increasing in size and scope to accomplish this task.”

A federal stimulus plan could funnel billions of additional public dollars into infrastructure and public works construction projects. At press time — just a few days before the historic inauguration of Barack Obama — Obama indicated that he would propose a nearly $800 billion package that would include tax cuts and credits, extended unemployment benefits and health care subsidies as well as investments in public works projects. For the latest news on the stimulus package, visit http://www.govpro.com.

Federal revenues: headed upward in the future 2009 forecast
(In trillions of dollars)

Total government purchases of goods and services, 2002-2015*
(In billions of current dollars, unless otherwise noted)