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The Overall State, Local and Education (SLED) Market

Lexington, Massachusetts based IHS Global Insight offers some good news to government contractors and vendors concerned about the trend line for spending by agencies. In their late May 2016 outlook, the global forecaster predicts that total government spending by state and local agencies will rise by 2.2% in 2016. While this outlook has been scaled back somewhat from an earlier 2016 forecast of 3.1%, it remains positive, reflecting a modest but still solid increase. Of course, these overall averages include a wide diversity of results, such as standout agencies with robust growth, those trending sideways or some with noticeable declines.

Most States Looking at Positive Revenue Growth

Revenue conditions for fiscal 2016 seem to indicate another year of moderate growth for state budgets.

National Association of State Budget Officers (NASBO)

According to Brian Sigritz, Director of State Fiscal Studies for NASBO, “It is projected that in total states will experience a sixth consecutive year of revenue growth in fiscal 2016, although the gains are expected to be modest and the positive growth may be less than the 4.8% growth rate for fiscal 2015.”

Sujit CanagaRetna, Fiscal Policy Manager at the Atlanta-based Council of State Governments’ Southern Office, predicts more of a mixed bag for the economic picture of state finances in the second half of 2016:

A number of states will see healthy economic growth resulting in steady revenue inflows, while others will face sluggish conditions as a result of over-reliance on the energy sector, capital gains and high income earners. In fact, many states were surprised by lagging revenues in April 2016 compared to the same period in the prior two years.”

Sujit CanagaRetna, Fiscal Policy Manager, Council of State Governments’ Southern Office

According to CanagaRetna, some states have significantly increased their spending, thanks to robust revenue inflows. One example is Georgia, which is making large investments in transportation. California is another state with a surplus, but policymakers are being cautious about overspending, given the fiscal challenges forecasted in the near term. Conversely, states such as Alaska, Oklahoma, Louisiana and North Dakota are confronted with depleted revenues for a variety of local reasons, including the cratering energy market.

Optimistic City Mayors are Playing “Catch Up” from Delayed Spending

As we start the second half of 2016, our budget [compared to] actual spending is favorable.

Frank C. Ortis, Mayor, Pembroke Pines, Florida

Many city mayors around the U.S. are optimistic as we head into mid-year 2016. “After experiencing our best year for income tax growth in two decades, 2016 income tax collections, our largest revenue source, have seen continued moderate growth,” said Dayton, Ohio Mayor Nan Whaley. Whaley told Government Product News (GPN) that job growth for the Dayton area has been strong, and that city officials are hopeful that the trend will continue into 2017.

In the Sunshine State, mayors are also upbeat. Fort Lauderdale, Florida City Manager, Lee R. Feldman thinks that “many local governments across the country are seeing an improvement in their fiscal condition” and that “healthier budgets in cities are causing a significant shift in resource allocation discussions.”

Feldman continued, “First, many communities will be facing a catch-up to the many years of deferred maintenance (roads, bridges, buildings) that was a result of parsing out limited resources during the Great Recession. Second, there are new issues that demand the appropriate level of funding – climate adaptation (infrastructure), public safety (aging fleets, body cameras, external threats to communities), and new and expanded regulatory requirements, just to name a few. And, third, cities are finding that they need to confront higher labor and capital costs for improvements.”

Feldman says it was easy to for city managers to just say “No,” or “We can’t afford that right now” during the past eight years when cities were still suffering the effects of the Great Recession. “With the economic recovery finally taking hold at the local government level, those words will likely no longer be the sole conversation at the budget table,” says Feldman. “Rather, there will be a struggle for allocation of the new resources.” For the rest of 2016 and 2017, Feldman offers this advice to city administrators around the U.S.: “Local governments that adhere to their visions and strategic plans will fare the best.”

Many local governments continue to be concerned about affording mandated expenses like healthcare and under-funded pensions. Even with rising revenues and greater willingness to make investments, these costs can limit increases in spending on government contracts with businesses. One of the tools that many cities are using to stretch dollars and improve their situation is buying things more efficiently – something that state-level agencies have been pioneering for a number of years. This may translate into fewer but higher value contracts or purchases made through cooperative purchasing associations that are not put out for competitive bid at the local level. As Mayor Ortis of Pembroke Pines, Florida noted: “As with most cities having to deal with increasing employee benefits, we will continue to be proactive in addressing such uncontrollable costs to the betterment of all.”

Final Thoughts

In spite of some recent slowing in growth rates, many government leaders remain optimistic about the prospects for the rest of the year and into 2017. It’s important to remember that the state and local government marketplace is one of the largest on the planet and is comprised of hundreds of individual industries and multiple levels of government agencies. When demand for some products, solutions or services becomes soft or decreases, there will always be others with growing or expanding demand. Onvia’s recent 10 Hotspots for Government Contracting in 2016 report lists a number of top industries that are posting positive annual growth rates of up to 30% in their number of competitive opportunities. Likewise, while some local agencies may be going through a slowdown in bids as they deal with their “uncontrollable costs,” many cities continue to expand and state agencies seem to be generally healthy and growing in bids.

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