COVID-19 crisis shakes up outlook for 2021 budget and beyond

What could the federal budget landscape look like in a world with the coronavirus pandemic and the government’s focus on it, plus any other future large-scale health crises?

Here is how some chief executives for publicly-traded government contractors have shared their views on that question, many times when asked, to investors during earnings calls over the past month. A few more calls are to come later this month and we will update this page with any additional commentary from CEOs to analysts.

Recall that the Trump administration submitted its fiscal year 2021 defense funding request in February, which was a pre-COVID world. That request also came out well before Congress moved on massive stimulus legislation to aid the current and post-COVID economy, plus discussions on how to resource and get ready for a potential future pandemic.

CACI International’s John Mengucci (April 30)

“I sort of look at closing our fiscal year '20 as sort of putting some sugar in your tea. When I look at FY '21, now you put a couple of drops in milk in there, it gets a little bit more cloudy. But what we do know?

“Last budget deal established discretionary funding caps for defense and nondefense spending, so I believe those are going to remain large and very healthy markets for us. National security priorities, I think, are as important as ever. If we had more time, we could probably talk about some of those threats.

“We have been watching and somehow those folks have become actually more prevalent bad actors as this nation has been going through COVID. So I see no lack of funding or lack of priorities in national security space.”

ICF’s John Wasson (May 5)

Here is part of one answer to an analyst's question:

“As you think about emergency funding on public health issues, the national emergency on the Stafford Act and then the significant stimulus package. I think those opportunities fall in kind of the public health arena in response to potential pandemics going forward. There's disaster recovery. There's resilience, both from pandemics and more broadly. Then I would also say there's potential infrastructure, and that's been a topic of conversation, certainly in potential future stimulus opportunities.

“Very significant resources have been committed here. There was $8.3 billion from the initial legislation around public health, $50 billion around the national emergency under the Stafford Act, $2 trillion in stimulus funding. Admittedly, a material amount of that goes to direct support to individual Americans and to companies, but there's also significant funding in there for public health and pandemic in disaster recovery issues.”

Followed by part of a second answer:

“The federal government has been through the stimulus program, working to provide either grants to small businesses or funding individual Americans, and I think those systems have been stressed significantly by the size and scope and speed with which this money is trying to get out there.

“Many of these systems are, particularly at the state and local level, but also at the federal level, given it's still in the early innings, still in ancient languages, COBOL, unfortunately and other languages that the systems really need to be modernized.

So I do think that some of the challenges that have been seen in kind of getting money out quickly, whether it's through unemployment insurance or funds to in-fill Americans to the (Internal Revenue Service) or through other small business programs. It just points to many of these systems are outdated and need a modernization.”

L3Harris Technologies’ Bill Brown (May 5)

“A lot of the things that we're focused on are well-funded in that (request), including a lot of the classified budgets. There's $135 billion of surplus investment account funding that still remains out there. It's going to provide a little bit of tailwind to us.

"As you go out into '22, beyond '22 into '23, you've got an election here. Eventually, you got a $4 trillion deficit that's going to have to be sort of paid for in some ways. But at the same time, you've got a very dangerous world. You could see what the North Koreans are doing, what the Iranians are doing, what the Chinese are doing, Russia.

"So we're going to continue to be tested. The threats remain there, and the investments that the DOD is trying to make are really long-term investments in technology that to sustain beyond the next couple of years. And we're hopeful that there'll be a bipartisan alignment to make sure we continue to fund DOD.”

Leidos’ Roger Krone (May 5)

First this part of his scripted remarks:

“Fiscal year '21's budget levels for both defense and nondefense spending are set under the bipartisan budget agreement, and Congress does not plan to change those levels despite the unprecedented spending increases being enacted to offset the economic impact of COVID-19. Consequently, there should be more certainty in the budget process this year, even though we expect fiscal year '21 to start under a continuing resolution due to the November elections.

“Longer term, however, deficit pressures could impact both defense and domestic spending levels, potentially starting as early as fiscal year '23. But again, the 18 to 24 month delay from budget dollars to outlay dollars does still provide us with runway before we are potentially faced with that dynamic. Further, DOD's unobligated balance of over $100 billion could mitigate the impact of any future cuts to budget authority in the first 1 to 2 years of a downturn scenario.”

Then this as part of a response to an analyst’s question:

“I actually thought we were going to get an NDAA (National Defense Authorization Act) this year, and now I don't think we will. I think we will be in a continuing resolution. So our forecasts are seeing a continued growing federal budgets and things operating in a normal way. Now I don't think that is going to happen, I think procurement will slow down. Things will take longer, meetings take an extra week or two, there is no travel.”

ManTech International's Kevin Phillips (April 29)

First this part of his scripted remarks:

"Currently, the administration and congressional focus appropriately remains on addressing the pandemic and resulting economic implications. As such, our sense is that moving to full operational status will be gradual, and we may be operating an additional portion of FY '21 under a continuing resolution. That said, we believe the agreed-upon two-year budget deal should afford a sound framework for funding levels, excluding additional funding that is established within the emergency funding bills."

Then this as part of a response to an analyst’s question:

"Generally, we see the FY '20 budget to be a good harbinger budget -- '21 budget as well because those two-year plans are already in place. There might be some timing as to when Congress can get to the '21 budget. If they aren't seeing anything that would say there's a redirect on this '21 budget is more of an additive set of requirements in response to COVID based on the emergency bills.

"Long term, I think that it's hard to tell, but I would say that you can tell the discretionary budget within the federal government has a high demand. And sometimes when it may not be invested in, at a point in time when there's an emergency, you can see where that is. So we'll have to see how this all plays out, just like we do for any emergency or any investment that the government has to make because they have to make hard choices as to how they need to redirect. But I would just reinforce that these events are an example when the discretionary budget that drives the decision to react in capacity to the federal government basically shows the importance of it."

PAE’s John Heller (May 7)

“Our outlook right now is that the government’s focus is on shoring up the economy and I’d say the same for foreign governments as well. We’re seeing outsized spending that has come through various bills from Congress and the president is very supportive of that.

"We expect that will carry forward into 2021 and potentially even into 2022 regardless of party. The economy is going to be the number one priority and the government’s going to use every tool they have in their bag to help stimulate that, and I think we’re going to see that trickle down into strong government services spending.”

Tetra Tech's Dan Batrack (April 30)

First this part of his scripted remarks:

"While we don't see it today, we would expect that in the future to see pressures on state and local budgets, which may be offset by federal government stimulus funding later in the year or even into next year."

Then this as part of a response to an analyst's question:

"Late cycle, we didn't see in the global financial crisis, the bottom out of state and local spending until about 2012. So about 3.5, 4 years later. So in the short term, we saw very little disruption and it actually was a few years later. I've seen some statistics. Some say it's typically 2 years. I can just speak to what we saw based on the portions of the market we're in. It was really much closer to 4 years. So we don't see that as an immediate issue, although we're not naive to believe it's not going to take place.

"There's certainly things a little bit different potentially this time. Every financial crisis does have its own vagarities. It is possible that the federal government stepping in with unprecedented size of financial contributions to many different areas has the potential that they would backstop all of this."