Fiscal stalemate will drag on into 2013, analyst forecasts

By Charles S. Clark

March 8, 2012

Longtime federal budget expert Stan Collender on Thursday predicted Congress will not pass any budget blueprints or spending bills before the fiscal year ends Sept. 30, and “the mother of all lame-duck sessions” in December will probably end with further delays on such key issues as the fate of the George W. Bush tax cuts, sequestration, and tax and entitlement reform.

It will be “one of the biggest messes you can have in government,” Collender, a budget consultant and writer and now a partner with Qorvis Communications, told an audience of information technology contractors assembled by Washington Technology magazine and the trade group TechAmerica. “The leadership hates lame-duck sessions because it’s impossible to discipline members who’ve lost and who may have already cleared out their desks.”

Collender said he can’t predict which political party will control which chamber after the elections, but polls show as many as 55 percent of voters are fed up with incumbents, which could result in the defeat of as many as 115 House members.

Hence with a new Congress still getting oriented in 2013, the country could see “the biggest kick the can down the road ever,” he said. That means Congress might pass continuing resolutions to postpone the day of reckoning on appropriations bills until summer of that year. The budget President Obama submitted a week late on Feb. 13 has “already disappeared from view” and is “primarily a campaign document,” Collender said.

Congress has pushed the next move on raising of the debt ceiling -- assuming effective cash management by the Treasury Department -- to at least the end of 2012, so the political calculation for most lawmakers is to do nothing this year on such time consuming macro-level issues as major spending cuts, tax reform, and changes in Social Security and Medicare. “As the economy improves, concern about the deficit goes down, and political attacks are less of an imperative,” he said.

The next Congress is apt to be closely divided and more moderate than the current one, dominated -- many think -- by the Tea Party, he said. This will lead to more compromises even though much power will remain with lawmakers at the ends of the political spectrum, he added.

Pressure on discretionary spending will force agencies to do without new contracts and perhaps even slow spending on existing agreements, Collender said. He advised prospective government contractors to use “creative financing” and to stress savings rather than costs, speaking a language geared to the public and Congress. Many IT investments pay for themselves over time, he said, sometimes during their first year, as has occurred in transitions to the cloud.

During a subsequent panel discussion, Kevin Plexico, vice president for federal information systems at Deltek, broke down the Obama budget’s current plan for $1.2 trillion in discretionary spending, $550 billion for contracting and $80 billion for IT. He noted civilian IT spending is slated for a 1.1 percent increase from 2012’s level.

The budget’s overall discretionary spending cuts were highest at the Justice, Health and Human Services, and the Housing and Urban Development departments, followed by the Army Corps of Engineers and the Transportation Department, he said. He showed increases at the Veterans Affairs, Education, State and Energy departments, and the National Science Foundation. But some departments getting spending boosts would see their IT budget cut, he added, among them Energy and State.

Loren Thompson, a defense consultant and chief operating officer of the Lexington Institute, told the contractors that many in the defense industry “don’t grasp” the major cuts coming in the Pentagon’s base budget, which is set to drop 22 percent over five years (and by $55 billion more annually for nine years if sequestration kicks in). Some “demand signals point down” for contractors, he said, but the United States, under a second Obama term, would still provide a third of global demand for military technology.

Demand for IT contracting, however, is weakened by insourcing, he said, and an overcrowded market -- except in cybersecurity -- could force many players out of the government services business. Boeing Co., he said, is likely to bow out, leaving four major companies: Lockheed Martin Corp., Northrop Grumman Corp., Raytheon Co. and General Dynamics Corp.

Edward S. Caso Jr., managing director and senior IT/Business Process Outsourcing equity analyst at Wells Fargo Securities LLC, presented the contractors with line graphs tracking government services firms’ stock prices in recent years. He noted that share prices spiked with the April 2011 budget deal, then went down, recovering briefly after the Budget Control Act passed last August, and then declined again when the threat of sequestration became clear.

He said the “new business headwinds remain stiff,” but added, “it’s still a great market. Low-cost providers win when markets mature, and the market is mature.”

By Charles S. Clark

March 8, 2012