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More good news graphs: State budget projections for justice, public safety, and homeland security

By Chris Cotner and Jeff Webster

The business and government news has simply has not been good this year. Several states (e.g., California, New York, Texas, Florida, New Jersey, Pennsylvania, Wisconsin, and Minnesota) have experienced wide-ranging problems including budget deficits, significant budget cuts, state shutdowns, contract freezes, public employee layoffs, riots, and massive public protests. The federal government just barely squeaked under the deadline to avoid national default.

However, things are looking up. The feds avoided default. Budget crises have been resolved in every state, as even Minnesota is now back to business. Cuts are coming to most states in FY 2012, but, at least now the states know where those cuts are coming. Other states are finding ways to loosen the belt a little, realizing they may have trimmed a little too close to the good meat (New Jersey). It is starting to feel like the crises are more or less averted and governments are working diligently to get back to business and move forward within their new confines.

We all need good news. However, we do not need the kind of good news that comes with blowing smoke. Rather, the government contracting community needs good news that is based upon solid data and analysis. At Deltek, we bring you just that.

I wrote about the good news of overall budget projections for the states in a previous article (here). Despite the net loss in FY 2012, state budgets are expected to flatten and begin upward growth in FY 2013. However, drilling down, there is more news around which to rally.

As part of our continued analysis of state and local budgets and spending, Deltek developed a set of statistical projection models to examine future trends in the justice/public safety and homeland security verticals (JPS and HS). What we found was more good news. Quite simply, JPS and HS verticals are projected to increase at the state level (see figure 1). The following analysis explains both the methodology and projections in some detail.

Figure 1: Justice/Public Safety & Homeland Security Total State Spending (Actual and Projected)

Click for Full Size

The Methodology

All good models start with good data. Deltek has accurate, sound data on state budgets (including IT) through FY 2012 for all states and into FY 2013 for some. However, having current budgetary data in itself is not enough to develop projection models. In order to project out past our current data, other data projecting various variables in the states are needed. For example, in JPS and HS, variables such as population, incarceration rates, federal spending rates, and violent crime rates all have the potential to correlate and impact spending levels. However, getting accurate projection rates for all of these variables for all states is simply not possible.

Within the haystack of available data, the Census Bureau produces some of the best projection data around. In fact, their projection of the 2010 U.S. population made in 2005 was off by only 0.06 percent. In terms of projection, businesses would give whatever they could afford to have a crystal ball that accurate out to 5 years. With this in mind, we used Census data to create the JPS and HS projection modeling.

Using Deltek's particularly robust budget data, combined with the Census' accurate past data and future population projections, we were able to create excellent models (highly correlative and highly predictive). Combining the JPS and HS projections for FY 2012 for each state and comparing them with the actual FY 2012 data produced identical results. While this is evidence of both good data and subsequent modeling, this kind of accuracy cannot be expected for each year moving forward. Nonetheless, we are certainly in the proverbial ballpark.

In terms of projecting individual state spending, the model works much better for some states than others. Texas, for example, due to recent budget cuts and related budget efficiency, comes in significantly lower in spending than projected. Other states with very small populations (the Dakotas) or very large populations (California) exist as outliers within the model and are difficult to predict. But, the models are both robust and elegant. So, averaging numbers for all states together, including outliers, produces amazingly accurate projections.

The Projections

Taking a look at Figure 1, above, the projection looks similar to my previous budget projection data (here).There is an uptick in FY 2011 (likely the result of stimulus spending), followed by a decrease in FY 2012 (the result of stimulus funding running out and most states engaging in budgetary reductions). Looking at the 95 percent confidence intervals, it is still possible for more JPS and HS loss in FY 2013 – 2014. Even in this worst-case and highly unlikely scenario, the model still indicates budgetary growth in FY 2015. However, all factors point to the news being better than this worst-case projection. In FY 2013, state spending in the combined JPS and HS verticals should flatten and begin getting back on track with a projected annual growth rate of at least 1.07 percent.

For subscribers, this article in Analyst's Perspectives contains additional detailed analysis of JPS & HS projections for the states (here).

Taking a look specifically at the JPS vertical data only (see Figure 2, below), the projections are even better. Since the FY 2012 data is virtually on the 95 percent confidence interval lower limit, FY 2013 is all but guaranteed to show positive growth. Simply, the chance that FY 2013 JPS will decrease is statistically insignificant. This is great news for vendors looking forward; look for funding to increase in coming years with an annual growth rate of at least 1.04 percent.

Figure 2: Justice/Public Safety Total Spending (Actual and Projected)

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Examining the HS data individually (Figure 3, below), there is still good news in projected upward growth, albeit at a much flatter rate than JPS. With the last two budgetary years (FY 2011 and 2012) being virtually on the projection line, the growth should continue along this trend. Looking forward and starting in FY 2013, look for overall state HS budgets to increase by an annual rate of 0.57 percent per year. Due to variability and fewer states providing data for this vertical, projected individual state HS budget growth rates are not available at this time.

Figure 3: Homeland Security Total Spending (Actual and Projected)

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Overlapping all three vertical projections on the same grid provides a better view of the big picture (see Figure 4, below). The flatter growth trajectory of HS funding becomes more apparent when viewed at scale. Analyzing the graph, JPS clearly has the bigger impact on overall funding. Subsequently, any shifts in HS funding have a minimal impact in both individual state and overall budgets across states. The best news of seeing all three together is that the future is bright with projections of budgetary growth in all areas.

Figure 4: Justice/Public Safety & Homeland Security Total Spending (Actual and Projected) Vertical Comparison

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Analyst's Take – Jeff Webster

The largest driving factor in public safety spending continues to be communication. Five years ago, public safety communication would have simply meant officer-to-officer communication. Today, that term has taken on a variety of new meanings. As states progress towards more advanced communication networks, communication will advance from officer-to-officer, to citizen-dispatcher-officer. This is being done through the incorporation of voice over IP within dispatch centers and additional broadband technologies which allow citizens to actively engage with public safety officials. Tools such as text messaging, video, and data communications are expanding the capabilities of public safety and its involvement within the community. Contracts for these services will continue to rise and will be the driving force behind spending in the next 10 years.

One of the unique factors in this market is its tie to the federal government. Agencies such as the Federal Communication Commission are leading the charge to improve public safety communications. The efforts to seek a nationwide public safety broadband network have and will be the common denominator between the public and private sector. The amount of potential spending as a result of a nationwide broadband network dedicated to public safety is immense. Agencies are already demanding this capability and are eager to build out data sharing networks. The projections above highlight the increased need for data sharing methods and services. With more people come more data and more responsibility to keep the public safe.

Vendors should expect to see continued contracting activity around radio communications and backbone equipment. Networks are being constructed now and will undoubtedly need to expand to include more users and more information. On top of this, dispatch centers and crime centers will be asked to do more with fewer personnel, but will begin to see an influx of tools that can easily supplement a lack of human capital. For example, intelligence led policing and predictive analysis will become common place in the next 5-10 years. We have already seen numerous DOJ grant programs focused on intelligent policing efforts and expect this trend to continue.

Vendors should also be prepared to respond to advanced data management within courts and corrections. A top priority for many state Governors is to reduce the amount of spending related to correctional facilities through the use of advanced monitoring techniques for non-violent offenders. The current courts and correctional system is overpopulated and has put massive strain on agency budgets. Closing prisons and implementing court/jail management systems will be nothing short of necessary in the coming years. Vendors should begin working with these cash-strapped court and correctional facilities today to ensure contracts tomorrow.

Analyst's Take – Chris Cotner

With talks of the national debt crisis, investor fears wreaking havoc in the stock market, and state governments in recent turmoil, any good news is welcomed by the business community. The prospect of growing JPS and HS budgets in FY 2013 and beyond is certainly good news. However, this news is delivered as a cautionary tale. First, while the overall budgets are improving, an individual state JPS and HS budget can experience sharp fluctuations from year-to-year with changing political priorities and projects. Second, FY 2012 is still a net budget loss for JPS and HS in most states. Third, while growth is projected, with annual overall growth rates at just over one percent, this market cannot exactly be considered booming. Still, in this economy, slow and steady beats a decline on any day.

As companies settle in for the coming difficult months in preparation for slow growth out of the decline, what can they do? I proposed six simple strategies in a previous article that are still sound in the JPS and HS market (here).

  1. Save the Date: Work toward strategies that capitalize on growth in FY 2013.
  2. Hunker Down: If you have existing contracts, you may need to focus on service and existing contracts to help make it through the hard times.
  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. 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: In state government, if a decision maker becomes interested enough in a business solution or product, as long as the purchase is below the threshold for legislative or cabinet-level approval, the funds can suddenly become available; things are moved around in the budget for items decision makers want.
  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.
  6. Engage Governments in Strategic Education: GovWin 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. Educate these companies about the possibilities well before any RFI/RFPs come out.

More specifically, Jeff Webster illustrated growth areas in the JPS and HS market. Some of these are explored below:

  • Governments are moving toward solutions that increase communication with and service to citizens. Any solution that includes such networking and communication ability is going to be a better sell in this market.
  • There will also be opportunities in nationwide broadband, data services, and secure cloud applications in these verticals. Just as the general government and business communities are moving toward more networked and cloud capacity for operations, so moves the JPS and HS market. The key for this market will be network and cloud security.
  • Just as companies are moving toward quantitatively-driven analytics for business, such evidence-based approaches to government services are becoming even more important in lean budgetary times. Simply, the government wants the most efficient bang for the buck. JPS and HS solutions that include data-driven and analytics solutions stand a better chance of winning contracts.
  • Corrections and community corrections are projected to place enormous strains on state budgets. Vendors can work toward solutions that save money and reduce costs to secure a win in these areas.

In sum, the resounding message is not to pack it in just yet. Despite many shaky financials, investor fears, and an overall sluggish economy, the population is growing. As the population grows, so grows human capital and the related potential, which creates demand. As human demand grows, the demand for products grows. One such product is government service. This steadily advancing demand will continue to drive both state revenues and related budgets. Stand firm, #govcon community; better times are on the way.

Follow Deltek and this blog for future updates, including predictive analysis of spending types and IT within the JPS and HS verticals.

Follow Chris on Twitter, here.

Follow Jeff on Twitter, here.

Visit the Justice and Public Safety Vertical Profile, here. Subscription required.

Visit the Homeland Security Vertical Profile, here. Subscription required.

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