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Most businesses are naturally fond of the promise of increased revenues from expanding markets and nervous about declining markets. This is just as true for the government marketplace as it is for the private sector. In Part 3 of this series on contracting expectations for 2016, Onvia explores the reasons behind the most recent four-quarter period of decline in bids and RFPs (Q3 ‘14 – Q2 ‘15) to help bring more perspective and address the nagging question about whether the market has truly “moved on.” In case you missed the previous installments of this series, catch up on Part 1 here and Part 2 here.

SLED Market Bids and RFPs - Annualized rates of growth - Onvia

Looking Back at What Drove the Declines of Q3 ‘14 – Q2 ‘15

It’s important to consider the major drivers and then ask whether these trends will continue. As we’ve discussed in previous editions of our quarterly state & local market snapshots, certain roadblocks or headwinds hit full strength by 2014. The sluggish pace of the broader U.S. economy that limited growth in tax revenues was definitely a major factor resulting in a tightening of budgets, but what really drove the decline in growth rates from Q3 ‘14 to Q2 ‘15 was a change in priorities on how the limited resources of government would be used.

Here’s an overview of the drivers that contributed to the lowering of competitive opportunity growth rates during that four-quarter period of time:

  • An effort to be better prepared for future economic downturns with “rainy day” funds. Moody’s Senior Economist Dan White was quoted in a 2014 Governing article saying that filling up reserves “is something that’s got to be done now while we’re cautiously optimistic, because if we wait a few years down the line, we’re going to be caught flatfooted.”
  • A targeted focus on supplementing underfunded pensions for public workers through increasing contributions by agencies.
  • A reluctance to take on more debt for major infrastructure purchases (even with historically low interest rates) and a preference to pay down debt in order to appear fiscally responsible.  
  • The expansion of Medicaid health coverage for low income individuals, which was a voluntary funding increase but was chosen by a large number of states.
  • Cautious budgeting and spending freezes for individual line items; an August 2014 Moody’s article commented that “state and local policy makers have been afraid to expand recurring items to their budgets.”
  • A commitment to efficient purchasing to find alternative ways to buy goods and services at a discount and more efficiently, or using less staff time. The impact of multi-year contracts and cooperative purchasing or piggybacking contributed to lower growth rates because agencies do not need to go out for competitive, advertised bids as often.

A Strange Brew: Growing Overall Budgets with Flat or Decreasing Line Items

The explanation for declines at a time when tax revenues grew for many agencies lies in the fact that while the costs to deliver standard government services remained the same or increased only slightly, several drivers like pensions, reserve funds and state Medicaid funding significantly impacted the ability of state and local agencies to afford across-the-board increases. During this four-quarter period, agency buyers worked to limit the number of bids and RFPs issued because A) They had fewer absolute dollars to work with or B) They faced an expectation to come up with better value on a per unit basis for the same spending levels as last year.  

What’s Behind the Recent SLED Procurement Market Recovery?

One explanation for the recent recovery in SLED opportunity growth rates is that meaningful progress has been made in several of the drivers mentioned above. In some cases this involves a shift in status of the problem, for example, moving from a “crisis” mentality to merely a position of “concern.”

  • In the case of pension funds, recent analysis shows that some progress was made by the end of 2014 - potentially taking some pressure off for 2015.
  • Cautious attitudes toward taking out more debt may be shifting under the weight of the increased attention paid to the issue of underfunded infrastructure.
  • State agencies have been successful in improving their reserve balances since the early days of the Great Recession – nearly doubling the amount of time that government can continue to operate once their regular budgets run out. However, this rising trend line began to shift by 2013, moving sideways. This suggests that fewer new states have been joining in and/or some states are choosing to reduce their contributions now that risk levels look better. More available funding across the overall market can mean less of a drain on competitive procurement.
  • In the area of cooperative purchasing and procurement efficiency, it’s quite possible that efforts over the last 3-5 years to create more “lean” operations have reached a mature level where co-op and piggyback purchasing have already been explored by the typical agency. One of the leading national co-ops reported a recent growth rate of 11%, which is lower than their historical average of 15%. If “everybody is already on board” with non-traditional buying this supports faster growth rates of formal bids and RFPs.

In short, some of the restrictions to growth in SLED contracting opportunities from a policy or operations perspective may have begun to relax. 

The Case for Growth in 2016

Previously in Part 2 of this series, we concluded that a modest growth rate of 1-2% in 2016 seemed reasonable assuming the market grows in 3 out of the 4 quarters in 2016. This outcome would be an improvement over the slight 0.3% increase achieved in 2015.

Onvia has reported on leading market trends that together point towards further growth in 2016, such as the continued adoption of smart infrastructure initiatives and open data. Below are some other factors or forecasts that support Onvia’s expectations of modest growth for 2016:

  • State and local government spending is forecasted to increase by 3.1% in 2016 according to IHS Global Insight.
  • According to the National Association of State Budget Officers, 43 out of 50 state governments enacted general fund budget increases for fiscal year 2016. 
  • In technology, Gartner estimated a rate of 1.1% growth for state and local IT spending in 2015 and forecasts an improvement to 1.9% growth in 2016, with total spending moving from $70.7 billion to $72 billion. If this forecast holds true then the number of technology-related contracting opportunities in 2016 should follow a similar path and increase as well. Onvia’s Q4 2015 State and Local Procurement Snapshot shows growth in IT improving from -4% in Q1 ’15 to +11.3% in Q4 ’15.

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    Q4 2015 State and Local Procurement IT/Telecom Industry Snapshot - Bids & RFPs - Onvia

  • State and local infrastructure spending has been forecasted to increase over the next two years. Moody’s Vice President and Senior Analyst Rachel Cortez expects that “by 2016 or 2017, growing capital demands will force local governments to significantly increase investment in infrastructure.” This general positive outlook is consistent with the recent uptick in AEC (architecture, engineering, construction) opportunities, which rose on an annualized basis for the first time in a year to a 4% pace, suggesting that the market may be shifting.

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    Q4 2015 State and Local Procurement - IT/Telecom Industry Snapshot - Bids & RFPs - Onvia

Conclusion

A few caution signs worth considering include the recent problems faced in balancing many state budgets, revenue weakness in some oil-producing states affected by reduced oil prices, lower gas tax revenue for some transportation projects, and the slow pace of economic recovery. All of these can affect the growth in tax revenue and confidence in the ability of an agency to take on more debt for major purchases.

However, with evidence from Onvia’s procurement data, market trends and the momentum building in growth rates over the past year, most factors point to a positive market in 2016.