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Authored by Chris Cotner, Senior Analyst, INPUT

This is part one of a two-part series on INPUT’s 10-year state budget projections.

The news for state and local government simply has not been good this year. Record government employee layoffs are reported across the country. Wisconsin rioted. Minnesota is currently not functioning as a government. California had several near misses and is cutting deep. Texas almost shut down state IT. New York, Texas, Florida, New Jersey, and Pennsylvania are all making deep cuts. What about the good news? Did we forget about that? No, we did not. There is good news in state budgets, and not so far in the future.

INPUT ran a statistical analysis of state budgetary spending from FY 1987 through FY 2012. This analysis, based on strong data and an extremely robust model, projects great news for future state budgets. What we found is graphed below (See Figure 1). We are calling it the “Good-News Graph.”

Figure 1: State All Funds Budget 10-Year Projections – Comparison 1

From FY 1987 through FY 2008, the data is remarkably consistent with an average 5.84 percent annual growth rate. However, the state budgetary train starts to unsettle a bit in 2009, moving slightly above the prediction line (compare the blue line of actual state expenditures to the red line of prediction by FY in Figure 1, above). This slight bump was likely the result of the first rounds of stimulus funding.

Then, budgets experienced a massive spike in FY 2010 and 2011 due to many factors, notably stimulus funding, increased health care costs (both for state workers and Medicaid), increased retirement/pension costs for state workers, and unemployment compensation. This is an anomaly – an outlier in terms of state budgetary spending with a combined 10.75 percent growth rate over the two-year period (FY 2010 was +6.68% and  FY 2011 was +4.07% - see Table 1, below). Projections put 2012 as the largest (and only) overall budget decrease (-2.99%) since we began tracking. It should be noted that the tracked data includes the seminal 1987, 2000, and 2001 stock market losses and resulting economic declines.

Table 1: All States All Funds Budgets Comparison by Year

Figures in red are projections.

While FY 2012 shows a record loss in overall funding, it is still well above the prediction (see blue and red lines, Figure 1, above). Why did this happen? Simply, states are getting serious about budget cuts as they face the specter of expiring stimulus funding. Slashing measures include layoffs of state workers, increasing state employee contributions to health care and retirement, state worker pay freezes or reductions, agency consolidation, efficiency measures through IT, and cuts to departments and programs deemed unnecessary in difficult economic times. Is this reason to abandon ship and leap from the towers of high finance? Probably not.

So, what does this mean for vendors and contractors? FY 2012 will certainly be difficult for most state governments and their associated contractors. However, even within this record budget reduction, there is good news as FY 2012 budget levels are still above those predicted by our model. Ultimately, these historic spending levels in FY 2012, while greatly reduced from the epic spending boom of FY 2010 through 2011, still contain a myriad of business opportunities. Even while cutting, states are buying the goods and services they need to properly function.

While only 20 out of 50 have reported budgets for FY 2013, we were able to use this data (again, very strong data and model) to project not only 2013 data for all states, but for fiscal years moving forward.  Looking at the orange line on the graph (see Figure 2, budget projections from FY 2013 data, below), the good news really solidifies in FY 2013; the blood-letting is predicted to stop with a near-flat growth rate of 0.13 percent. Largely, this will be the result of states having made the hard choices and deep cuts needed to balance their budgets and get back to business. Look for business prospects with the states to improve from here onward.

Figure 2: State All Funds Budget 10-Year Projections – Comparison 2

Comparing trends and projections, the states’ budgets illuminate the larger picture for overall economic recovery. Contrasting the red line (budget projection from FY) to the orange line (budget projection from 2013 data), the data shows lower-than-normal spending for portions of FY 2012 through FY 2014 (see Figure 2, above). The best news in making this comparison is that spending is projected to be lower than expected for only a portion of 2014. In short, budgets are expected to continue and accelerate the growth projected in FY 2013 into FY 2014. While growth should accelerate in FY 2014, look for states to be back on track in FY 2015 with an average annual growth rate of about six percent. For the best illustration of this, compare the projections from all data sources (see Figure 3, below) by looking to where the red, orange, and green lines converge in 2014.

Figure 3: State All Funds Budget 10-Year Projections – All Trends and Projections

Analyst’s Take: Quite simply, this is good news. While similar dates for economic recovery are often reported in the media, we at INPUT thought you would want to see our analysis in black and white. The data makes a lot of sense, explaining what many in the business community may have been sensing and feeling.

We are just beginning to scratch the surface of this data at INPUT. Stay tuned for coming reports and articles on the impact of state budgets on various verticals (health care, social services, justice and public safety, and IT). With that said, there are things companies can do to take immediate advantage of this business intelligence to leverage business with state governments during these difficult times.

Since you are a subscriber, part two of this article is included below, published earlier than the blog as a bonus.

Ten-Year State Budget Projections and Business Opportunities, Part Two: Six Simple Strategies to Do Business with the States in Hard Times.

This is part two of a two-part series on INPUT’s 10-year state budget projections.

As mentioned in part one of this series, the news regarding state financials has not been positive for a while. FY 2012 is looking like one of the worst (in terms of a decrease in overall state budgets) in history. However, things are looking up as business opportunities exist now and are projected to increase looking at FY 2013 - 2015. For businesses interested in capitalizing on this business intelligence, here are 6 simple strategies to survive doing business with the states during these economically hard times.

1. Save the date: Circle the wagons; circle the date; save the date; do whatever it takes to make it through FY 2012; weather slower growth in FY 2013; and capitalize on more normalized growth in FY 2014 and 2015.
2. Hunker down: Even during difficult recessionary times, states still do business procuring goods and services. If your company has an interest in doing business with a particular state, hunker down and wait out the storm. If you have existing contracts, you may need to focus on service and existing contracts to help make it through the hard times. By FY 2013, things should be improving slightly. By FY 2014, most state business should be back on track. State economies should be chugging along at pre-recession growth levels by FY 2015.
3. Let the wind take the chaff: Weaker companies will not be able to weather this storm by waiting for state purchasing to pick back up in the next few years. If your company has interest in doing business with a state, weathering the storm will ultimately prove fruitful. As weaker companies fall aside, when procurement and opportunities pick back up, you should be well-positioned in a market with fewer competing companies. In the meantime, continue to let officials know your company is stable and ready for business when opportunities arise.
4. Talk to decision-makers to create the want: Through my 13 years working in state government, I’ve learned a few things. Most companies believe that unless there is an RFP, and money is specifically allocated in a budget, then procurement will not happen. This is similar logic used by some in their job searches; if a position is not advertised, there must not be any openings. Sure, sometimes it works that way. However, in state government, if a decision-maker becomes interested enough in a business solution or product, the funds can suddenly become available as long as the purchase is below the threshold for legislative or cabinet-level approval. Things are moved around in the budget for items decision-makers want. Simply, find those decision-makers and make your pitch. If enough desire is created, your solution should at least be on the table for further discussion, worst case. Who knows, you may just secure a surprise and lucrative contract.
5. Get creative and cooperative: Governments want solutions that do a few simple things, including increasing efficiency (saving money), improving service to citizens, and creating job opportunities. As I have suggested in several previous blogs, states are not as interested in bandit contractors who only provide solutions that take funds away from the state. Get creative with providing solutions that save the state money. Get cooperative with providing solutions that will bring jobs to the state. Trust me; your company will be in the next governor’s press release if you do. Many companies have shied away from true cooperation with state government. Rediscover the lost art of giving back to the community, and bring more than the latest shiny solution.
6. Engage governments in strategic education: INPUT continues to read and hear from state officials who are interested in finding out the best possible solutions for the problems they face. Often, they are not aware of the possibilities. This ignorance impacts RFPs and RFIs that are released since they only ask for what the agency believes it can get. Take the time to educate decision-makers on possible solutions through a cooperative and consultative process. A sales pitch can always be disguised as a consultation. However, creativity in solutions for states should always include saving money and improving services. If your solution by itself will not meet all of a state’s needs, offer solutions that would require your cooperation with other vendors. Even if your company winds up with a subcontract out of the deal, it is still a win.

Read more about state budgets in INPUT's state profiles, here (subscription required).

Follow Chris on Twitter, here.