The federal budget has been on a roller-coaster ride – and one with some pretty steep drops – for the last few years, and it can seem like the contracting industry can do little but strap in and hold on.
Except, of course, that there are other, very similar clients. Clients who may see a recovery and a spending boom, even as the federal budget continues to decline.
Fifty of them, in fact.
A new Deltek analysis, available as a free download, puts into perspective the declines in state budgets in recent years – and predicts that state spending will mean new opportunities for contractors before the federal budget recovers.
A Sharp Decline
For states, 2012 was one of the toughest fiscal years on record. Combined all funds budgets fell by $42.1 billion (a drop of 2.4 percent) from FY 2011 levels. This was the first all funds drop in state budgets since 1987, and more dramatically, came after $87.9 billion (+5.6 percent) in overall state budget gains from FY 2010 to 2011.
From 1987 through 2010, state budget growth stayed remarkably consistent — an average 6.24 percent compound annual growth rate (CAGR).
However, as the recession took hold, growth rates slowed to 3.56 percent in 2011 and fell into the red for 2012.
The recession hit states hard, and unlike the federal government, many are forbidden from deficit spending. Between 2008 and 2011, state spending continued to grow even in the face of the recession thanks mostly to federal stimulus funding, increased health care costs (both for state workers and through the increased Medicaid rolls as the result of the recession), increased retirement/pension costs for state workers, and unemployment compensation.
However, the bulk of the most difficult cuts came in 2011 and 2012, as states adjusted to dwindling stimulus dollars.
Growth Ahead
The decline, however, is largely over. Deltek’s analysis of state budgets indicates good news ahead for the states and related state government vendors.
Deltek’s annual state budget analysis shows that with state revenues on the rise, all funds budgets are set to rebound in 2013, increasing $20 billion (an increase of 1.21 percent) to $1.67 trillion overall.
The increases won’t stop there. Deltek’s updated state budget projections show great news for continued upward growth in state budgets moving beyond 2013. Last year, Deltek proffered a conservative projection of near-flat growth of 0.13 percent for state budgets in 2013.
The timing of that guess was right. The numbers, however, proved to be too conservative. States are rebounding even faster than anticipated, with a 1.21 percent budget increase for 2013.
The blood-letting has stopped. States made the adjustments they needed and increased revenues, ending balances and rainy day balances.
State budgets are projected to continue their upward growth, moving toward a CAGR of approximately 2.78 percent by 2014.
Opportunities for Industry
This projected upward trend is excellent news for contractors.
With budgets improving, states are procuring again, including various capital, construction, and IT-related projects. Those traditional opportunities will again be appearing.
However, the recession taught states something – and the lesson will lead them to spend money.
With an eye to future budget challenges, states are looking toward increased efficiency. They will increasingly look for technologies and solutions that enable them to provide services at lower cost – in many cases, the same technologies industry is currently pitching to federal agencies.
The best news is that while they have money to spend, states are still largely unaware of many of the available efficiency-oriented solutions that can also improve their service delivery. Cloud solutions, mobile technologies and opportunities to use big data to improve services make sense, not just for federal agencies facing budget restrictions, but for state governments facing the need to grow more efficient as a defense against future budget struggles.
That presents the contracting industry with a tremendous opportunity – and a stable of new clients to pursue, even as federal agencies look to cut spending and headlines predict financial doom.
Chris Cotner is a principal analyst at Deltek and a member of Deltek’s State & Local Industry Analysis team, which provides strategic and tactical assessments of state and local IT markets, including software, hardware, communications, network services, professional services, and outsourcing along with insights into government spending, market trends, policy and legislation, and business development best practices.