Onvia Blog A More Cautious Environment for Spending in 2018

GovWin+Onvia recently released our latest quarterly report, the State and Local Procurement Snapshot of Q1 2018. As a special feature included within the report, we interviewed government market expert Michael Keating to get his perspective on the increasingly cautious public sector procurement environment, and his suggestions on what the best vendors and contractors can do to get ahead. The relatively robust government budgets and spending increases that were common in 2017 seem to have diminished a little in 2018. This will mean more cautious spending among state, local and education (SLED) governments, as predicted in GovWin+Onvia’s 2018 State & Local Government Contracting Forecast. Even though growth will be largely missing from the equation, the $1.5 trillion SLED market should remain healthy and will offer plenty of contracting opportunities for vendors. SLED Governments are Shifting Gears Expectations for minimal growth in government spending can be found across the board, from economists to government officials and procurement staff. For example, Wells Fargo’s 2018 Annual Economic Outlook predicts that “The inflation-adjusted state & local component of the government GDP line [should] expand just 0.8 percent in 2018.” The report notes that “Fiscal challenges extend down to the state & local level… Years of structural headwinds such as moderate economic growth… and rising pension and healthcare costs have weighed on state & local budgets, limiting spending growth in other areas…” In their Q4 2017 forecast, Deloitte provided a similarly subdued outlook, writing that “State and local spending growth will likely remain low…” Sluggish Spending by States and Municipalities SLED government officials and buyers seem to be adapting to the realities of slower or limited growth in agency budgets. At the state level, weak revenue and challenges paying for mandated expenses like Medicaid and pensions have led to tighter budgets. According to the National Association of State Budget Officers (NASBO), a total of 22 states made net mid-year budget cuts totaling $3.5 billion in Fiscal Year 2017. What’s more, states enacted cautious budgets for 2018 following two consecutive years of sluggish revenue growth. State general fund spending is projected to grow 2.3 percent in FY 2018, the lowest spending increase since FY 2010. A total of 26 states enacted general fund spending increases below 2 percent in FY 2018, including 15 states with spending declines. Sluggish growth in spending is not limited to state agencies. Some cities have experienced economic growth and have seen corresponding revenue growth – some have not. Lee R. Feldman, City Manager, Fort Lauderdale, FL Feldman says he’s heard about several areas of concern from his counterparts across the country: Funding infrastructure and the need to catch up from years of deferred maintenance on city facilities; employee wages and benefits (healthcare and pension); and public safety. The last area, says Feldman, covers needed spending “to prepare for the new normal of threats to schools and special events (concerts, festivals, etc.).” The National League of Cities’ (NLC) latest City Fiscal Conditions Survey says some local governments are even seeing their revenues shrink. Even as property tax revenues grow, many cities are seeing declining - or at best, stagnating - sales tax collections. The NLC survey shows some communities are facing unavoidable expenses. “Costs that can no longer be delayed, such as those for infrastructure and for employees and retirees, as well as cuts from federal and state partners, will continue to contribute to the fiscal uncertainty facing cities,” explains the survey summary. An informal survey of local government officials who are members of the International City/County Management Association (ICMA) mirrors the above forecasts. About 78 percent of the 19 ICMA survey respondents say budgets will be flat or down in FY 2018 vs. 2017, however more than half (57 percent) say by 2019 budgets will again increase. Higher Costs for Public Works Construction The total amount of public works construction in the U.S. will climb 3 percent in 2018. Contract authority funding from the Fixing America’s Surface Transportation Act (FAST Act) is growing 2 percent annually through FY 2020, which should help expand highway and bridge construction. If it gets Congress’ approval, the Trump administration’s infrastructure program will also boost dollars for projects. But rising infrastructure costs could be a problem for government administrators, says Paul R. Soglin, mayor of Madison, WI, and a Democratic candidate for governor in Wisconsin’s Nov. 2018 elections. With the recession behind us, building contractors have plenty of work. The shortage of skilled laborers and materials will significantly drive up construction costs. Governments letting contracts will find bids coming in over budget; increasing private construction costs will lead to higher rents and operational costs. Paul R. Soglin, Mayor, Madison, WI Soglin offers this bit of advice to government project managers: “Keep your debt service as low as possible; let those bids as soon as possible.” Tom O’Grady, corporate president of employee-owned infrastructure solutions firm HNTB Corp., also advises local government officials to move quickly on upcoming construction projects. He sees market forces changing and project prices mushrooming. “Advance projects aggressively – costs are escalating and may accelerate as the economy continues to improve and inflation continues to grow,” is O’Grady’s advice to public sector project managers. Mooresville, NC Mayor Miles Atkins says his city’s biggest overall budget challenge continues to be traffic and transportation needs. “As a rapidly growing community, we are concerned that current dollars for transportation and other capital needs cannot cover the rising cost of construction.” Over the next five years, Mayor Atkins estimates that more than $350 million in state and local funds will be spent to address traffic and transportation needs in Mooresville. The construction market is booming, and building contractors are now seeing opportunities that might be more lucrative in both the private sector and in government, says Terry McKee, IT & Procurement Director for the Knoxville, TN Community Development Corporation. As a result, government agencies are seeing fewer bidders and higher prices on their proposed projects, McKee believes. Contractors can be choosier about bidding, and in fact sometimes they are not bidding because they have too many other irons in the fire. Terry McKee, IT & Procurement Director for the Community Development Corporation, Knoxville, TN Lean Staffing and Modern Procurement GovWin+Onvia’s 2nd annual survey of government procurement professionals showed nearly 40 percent of the procurement staff surveyed indicated their teams were stretched or working extra hours to meet their deadlines—up 4 percent from the previous survey. Leaner staffing is what Russell Pankey, procurement manager for the City of Independence, MO, is experiencing. “I’m seeing more staff reductions yet an increase in the amount of work we are doing. Maybe it’s due to fewer people,” Pankey says. Along with the reduced staff, Pankey sees public procurement departments relying more on cooperative contracts for agency purchases. Budgets and staffing have stood at a standstill since 2010, says Cynthia M. Matz, a buyer in the Walworth County (WI) Public Works Purchasing Division. “Walworth County is not increasing staff, and there have been no increases to the budget either. We are being asked to remain the same. Since that has been the case since approximately 2009 or 2010, our resources go less far each year.” Matz says government agencies need to look at the entire competitive bidding process and make it digital. Procurement departments need to look at their future, and modernize their procurement methods to meet the demands of the younger generation. If we want our profession to be of value, we need to ‘modernize’ ourselves to meet the needs of the public and our agencies. Cynthia M. Matz, Buyer, Public Works Purchasing Division, Walworth County, WI The National Association of State Procurement Officials (NASPO) has issued its Top 10 Priorities for State Procurement in 2018. One of the priorities is IT Procurement Transformation, which calls for several strategies, including the following: Leveraging new IT contracting models and methodologies: Agile/iterative procurement, cloud and SaaS procurements Centralized IT authority in statewide procurement Early involvement in executing large IT procurements, terms and conditions and enhanced cybersecurity Brian Strosser, president at government technology provider DLT Solutions, says it’s key for government agencies to keep their IT installations up-to-date. With legacy infrastructure continuing to age, coupled with the need to do more with less, IT modernization remains critical. Brian Strosser, President, DLT