2010 Keating Report on government budgets and spending
Few believe the U.S. economy will completely bounce back to solvency and strength in 2010, but there already are signs that a recovery is under way. Corporate earnings are getting stronger, the stock market recently hit a new 15 month high, unemployment growth rates are slowing, the Standard & Poor’s/Case-Shiller price index is signaling that home prices are starting to climb, and sales of previously owned U.S. homes jumped to the highest level in nearly three years last month.
On the less optimistic side of the ledger, however, the federal deficit for the 2009 budget year, which ended on Sept. 30, set an all-time record in total dollars, at $1.42 trillion. That was $958 billion above the 2008 deficit, the previous record holder.
Budget watchdogs in the Obama administration aim to curb the flow of red ink in coming years so as not to stall the fledgling economic recovery. Tentative plans call for freezing or modestly cutting federal agencies’ budgets as part of an election-year push to rein in the budget deficits that threaten the economy and Democrats’ political prospects this fall.
Even with the potential spending freeze, federal purchases of goods and services will rise to $1.19 trillion in 2010, up from $1.14 trillion in 2009, according to Waltham, Mass.-based economic forecasters IHS Global Insight (http://www.ihsglobalinsight.com/). Contact Michael Keating ([email protected]) for a chart outlining IHS Global Insight’s forecasts covering purchases by all levels of government.
Federal revenues, says the Congressional Budget Office (CBO), also are expected to grow in the years ahead. Contact Michael Keating ([email protected]) to see the chart from the CBO’s recent “The Budget and Economic Outlook: An Update.” Download the CBO Outlook summary from the CBO’s Web site.
“I see no evidence that President Obama and Congress will stop the spending spree in 2010,” said Brian Riedl, a senior policy analyst at the Washington-based Heritage Foundation, a research institute that formulates and promotes conservative public policies. “Stimulus spending is projected to top $350 billion, and many of the TARP, Fannie Mae and Freddie Mac bailouts will incur large costs. President Obama and Congress also continue to insist on 8- to 10-percent increases in discretionary spending, and are considering massive government expansions in health, education, highways, and energy.” Riedl’s overall conclusion about the federal budget in 2010: “Expect the trillion-dollar budget deficits to continue.”
Federal stimulus dollars from the American Recovery and Reinvestment Act (ARRA) of 2009 will affect the economy in 2010. “We anticipate that approximately $100 billion in stimulus contracts will reach the private sector next year, creating about 1 million jobs, with California, Texas, Florida, New York and Washington state serving as the biggest engines of job growth,” said Michael Balsam, chief solutions officer for Onvia, a Seattle-based company that tracks federal stimulus spending.
Balsam told Government Product News that most of the federal stimulus dollars up to now have funded transportation and infrastructure project contracts. “In 2010, Onvia expects the spending to shift to longer-term investment areas such as health care technology, clean water and renewable energy,” he said.
Beyond ARRA stimulus funding, President Obama and the Democratic majority in Congress are assembling “Jobs for Main Street” legislation that would devote as much as $174 billion to job-creation projects in 2010. Lawmakers are moving swiftly to get a 2010 jobs bill to Obama’s desk sometime this month or in February.
Parts of the legislation address government needs with significant funding, including:
- $1.18 billion for law enforcement jobs (primarily the COPS program)
- $27.5 billion in additional highway infrastructure investments
- $8.4 billion for public transportation investments
- $1 billion for the Clean Water State Revolving Fund
- $1 billion for the Safe Drinking Water State Revolving Fund
State government spending
Budgets in 2010 generate a fair amount of pessimism in state governments. Staffers from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) forecast continued fiscal difficulties for states in their preliminary draft of the biannual “Fiscal Survey of States” report. The groups note that the severe national recession drastically reduced tax revenues from every revenue source during fiscal year 2009, and that state revenue collections are expected to continue their decline in fiscal 2010.
Sujit CanagaRetna, a fiscal analyst for the Lexington, Ky.-based Council of State Governments (CSG), told Government Product News: “Even though there are green shoots of growth emerging on the national economic horizon, state revenues notoriously lag the national recovery, so states are looking at a grim immediate future.”
States are pursuing aggressive strategies to rejuvenate their economies and are reviewing how they can pay for government services during and after the current recession, CanagaRetna said. “California, Colorado, Kentucky, Nevada and West Virginia formed commissions or blue-ribbon panels to address such topics as the expansion of the state sales tax to cover services. A majority of states apply their sales tax to less than one-third of 168 potentially taxable services, even though the U.S. economy has moved away from the manufacturing sector to one dominated by the service sector,” CanagaRetna said.
He noted that states also are looking at applying sales taxes more universally on Internet purchases, a tax category that has grown exponentially in recent years.
Many states continue to rely heavily on revenues from gaming and lotteries. “In fiscal 2009, U.S. lottery traditional sales totaled $53.3 billion, with approximately 30 percent of total lottery revenue being directed toward key struggling state programs, including education,” said Jaymin Patel, CEO of GTECH, a Providence, R.I.-based lottery and gaming technology and services provider.
Patel told Government Product News that many of his firm’s state government customers are reporting increased revenues when comparing this year to last. He also believes lotteries can have a bigger impact on states’ fiscal health. “A study commissioned by Frost & Sullivan in 2009 found that if state lotteries implement small best practice changes and continue to modernize their lotteries, the potential exists for lotteries to generate an additional $14 billion in funding for state governments facing unprecedented budget gaps.”
Local government spending
Counties are coping with declining tax revenues by delaying capital investments among other steps, according to a National Association of Counties’ (NACo) economic status survey. Four out of five respondents (82 percent) said their communities’ budget shortfalls would continue into their next fiscal year. Washington-based NACo represents county governments in the U.S.
Cities, likewise, are managing tough fiscal conditions with a variety of strategies. In its latest “City Fiscal Conditions Survey,” the Washington-based National League of Cities (NLC) reports that cities are instituting hiring freezes or layoffs (67 percent of respondents), canceling capital infrastructure projects (62 percent) and cutting services other than public safety (32 percent). Many of the cities that responded to the survey are decreasing spending on non-personnel operating expenses. NLC represents municipal governments throughout the U.S.
More federal help is needed to plug holes in local and state government budgets, said Doug Hall, director of the Economic Analysis and Research Network at the Washington-based Economic Policy Institute, a nonpartisan think tank. “Another round of state fiscal relief — through mechanisms such as the Federal Medical Assistance Percentage funding program (FMAP) and the Education Stabilization Fund — would help create millions of jobs, and in so doing, would help guide state and local fiscal situations back onto solid ground,” Hall told Government Product News.
Government construction spending
In its “Construction Outlook 2010” report, New York-based McGraw-Hill Construction (MHC) estimates that the value of public works construction projects under way will grow 14 percent over 2009 levels, reaching more than $136 billion dollars.
Construction of schools, healthcare facilities, and other government and institutional buildings will advance more modestly in 2010, according to MHC. The value of government and institutional building projects under way in 2010 will rise 1 percent over 2009 levels, reaching $111 trillion in 2010. By comparison, non-public-building sectors, such as hotels and manufacturing building construction, will shrink further in 2010 over 2009 levels; the value of manufacturing construction, for instance, will drop by 14 percent in 2010 over 2009, predicts MHC.
In 2010, public buildings construction projects will cover 51 million square feet, up 8 percent over 2009 levels, according to MHC preliminary estimates. Courthouses and airport-transportation terminals are some of the government projects covered in this category.
“Of all building types, [public/government buildings] have received the most direct federal stimulus infusion,” explained MHC analysts in their 2010 construction forecast. One recipient of hefty stimulus awards is the federal General Services Administration, which hopes to have 91 percent of its $5.6 billion stimulus funding under contract by Sept. 30, 2010. Some $4.5 billion of the GSA stimulus funding is earmarked for energy-efficiency upgrades to federal buildings.
ARRA provides $4.2 billion to the Department of Defense for modernization and restoration of facilities, with a sizable percentage of those stimulus funds to be spent in 2010 and 2011.
Healthcare facilities construction is one public/institutional sector that will see solid growth in 2010 spending, reaching $21.8 billion in 2010, up 5 percent over 2009 levels. The Defense Department is planning to spend $1.3 billion of its stimulus dollars on healthcare construction, including building replacement military hospitals at Ft. Hood, Texas and Camp Pendleton, Calif.
A few of the growth categories in public works construction for 2010 include highways, bridges and environmental public works projects. ARRA stimulus funding has been apportioned to the states, under existing federal programs, for surface transportation and other infrastructure categories.
ARRA allocations also should help boost funding for water resource projects and other environmental spending; in 2010, spending for environmental construction should exceed $40 billion, which is an 18 percent gain over 2009 levels, predicts MHC.
“Funds from ARRA are making up for lost funding from state revenues,” said Heather Jones, a construction economist for the Research Services Group at Raleigh, N.C.-based FMI, which provides management consulting and investment banking services to the construction industry.
Jones told Government Product News: “Strong government construction markets in 2010 are going to include conservation and development (U.S. Army Corps of Engineers work), and water and sewer projects. Conservation and development construction will grow 10 percent in 2010 to $6.2 billion. Water and sewer construction will grow 5 percent and 4 percent to $26.9 billion and $17.8 billion, respectively.”
In its annual forecast, the American Road & Transportation Builders Association (ARTBA) predicts that the value of highway, street and bridge construction put in place should reach $90.5 billion in 2010, up from about $83.9 billion (an 8 percent increase) in 2009.
ARTBA Vice President of Policy and Economist Alison Premo Black cautions, however, that the boost to the market could be temporary. Uncertainty about the reauthorization of the multi-year federal surface transportation bill and future growth of the overall U.S. economy, along with the end of stimulus funds, will determine if there is a “soft landing” in 2011 or a more significant downturn, Black says.
Government security spending
Cleveland, Ohio-based Freedonia Group, sees continued growth in government spending for a variety of electronic security products and systems in the years ahead. Their purchases of security products are projected to increase 7.7 percent per year through 2012, reaching a value of $2.6 billion. By 2017, government and institutions will spend $3.8 billion annually on security systems. The ongoing conversion away from manned security to more automated electronic equipment is driving some of that growth, say Freedonia analysts. Some of the main security spending categories include: access controls, alarms, CCTV surveillance units and contraband detection systems.
Freedonia’s Electronic Security Systems report (study number 2332) explains: “In an attempt to maximize security effectiveness, the federal government, in particular, is expected to deploy advanced, high-end solutions such as biometric-based access controls, high tech explosives detection systems and intelligent CCTV systems.”
ARRA has tentatively given a much-needed boost to the economy, and more relief may be on the way from Washington. Local and state government administrators are facing declining tax revenues and need to make tough budget choices.
Federal agencies, likewise, may face tighter budgets, even as President Barack Obama last month signed into law a $1.1 trillion bill that increases the budgets in many areas of the federal government by about 10 percent, including health, law enforcement and veterans’ programs. The bill lumps together six of the 12 annual appropriations bills for the 2010 budget year that began October 1.
Talking about budget shortfalls, the CSG’s CanagaRetna explained: “Unfortunately, there are no easy, permanent fixes in the short-term.”
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Michael Keating is senior editor for Government Product News. Keating can be reached via e-mail at [email protected].