Feast or famine? How will the new budget impact contract spending?

We are halfway through the fiscal year, and we now have a full appropriations act for the entire federal government for fiscal 2018, the “Continuing Appropriations Act of 2018.” What will be the impact of this on government services contractors?

First, the act means the end of the constraints imposed on both funding and programs by the series of continuing resolutions under which the government has been operating since Oct. 1.

It also eliminates any risk of another government shutdown due to a lapse in appropriations, something that has occurred twice this year already.

Second, it provides substantial increases in funding for numerous agencies and programs. Under the Bipartisan Budget Agreement of 2018, enacted on Feb. 9, the Budget Control Act caps for fiscal years 2018 and 2019 were raised significantly, and the fiscal 2018 final appropriations provides funds for most of those increases.

The Department of Defense has the largest appropriations increase, $80 billion above the previous budget cap for 2018 and $26 billion above the president’s requested budget level. For non-defense agencies, the cap was raised by $63 billion, but the omnibus appropriations bill distributed that increase unevenly and incompletely across those agencies. We are still sorting through the bill’s 2,100 pages, but it’s apparent that some departments and agencies will see an increase well above both their fiscal 2017 funding levels and above the president’s budget request for 2018, while other agencies will see lower funding levels.

In the aggregate, though, these increases, spanning many agencies and programs, may well turn the second half of fiscal 2018 into a very different market for contractors than it was in the first half. To understand how it will change, let’s look back at government contract spending in the first half of 2018. 

Public data for DOD contract obligations have not yet been released, even for last October. However, monthly defense spending (as reflected in Treasury Department outlay data) for the first five months of fiscal 2018 show that defense spending was up by more than $10 billion (nearly 5 percent) compared to the same period under the fiscal 2017 CR, even though fiscal 2018 CR funding was slightly less than fiscal 2017. It appears that DOD has been spending at a rate that anticipated an appropriations increase.

The total defense increase is 15 percent above the previous caps, but only 4 percent above the programmed budget that DOD had prepared. For contractors, this likely means increased opportunities, but perhaps not as much as the numbers might indicate at first glance.

For non-defense agencies, the first half spending story is quite different, and here we do have official data to analyze. Comparing fiscal 2018 CR first quarter contract obligations to the same period under the fiscal 2017 CR shows a drop of 27 percent year-over-year. This is the largest single quarterly decline in a long time.

Obligations for services contracts declined only slightly less, 23 percent year-over-year. In some agencies, the decline has been even greater. For example, contract obligations for the U.S. Agency for International Development saw a year-over-year decline of nearly two thirds.

This pattern raises two important questions for services contractors; Why did that decline happen? Is it about to change?

First, why the decline in contract spending? Maybe it’s because the president’s proposed budget for fiscal 2018 included significant funding reductions for many non-defense agencies. With CR spending levels unchanged from 2017 throughout the first half of fiscal 2018, and the prospect (or risk) of final funding even lower under the president’s budget, some agencies appear to have planned for and spent at rates equal to the lower numbers.

Second, will that decline in contract spending reverse itself under the significantly higher full-year appropriations levels? Since the president’s proposed budget for fiscal 2019 for many of these non-defense agencies does not include that increased spending, this can put agencies in a bind. Do they spend the money Congress appropriated for fiscal 2018 and anticipate similar levels of appropriations for fiscal 2019, or do they spend only to the president’s budget level while anticipating reductions for 2019?

Comments from Mick Mulvaney, director of the Office of Management and Budget, at the Feb. 12 release of the president’s 2019 budget may offer some insight. With regard to the $63 billion increase in the non-defense appropriations cap that the president had just signed on Feb. 9, Mulvaney stated that “we don’t need to spend all the money.”

Another indicator is the omnibus appropriations bill itself. Congress expanded only DoD’s flexibility to permit more spending in the final two months of the fiscal year, for the DoD operation and maintenance accounts. Year-end spending is typically limited, but despite the late enactment of 2018 appropriations, other agencies will have no greater flexibility to spend the additional funds than in the past.

Finally, will OMB constrain non-defense agency spending? If so, will it do so indirectly, or will it issue direct written guidance? How rapidly and fully will OMB and agency comptrollers apportion and allocate funds to program offices? Independent of OMB guidance, will agencies be able to spend the additional 2018 funds in the remaining half of the fiscal year? It’s too soon to know the answers to these questions, but they will directly determine contract spending over the next few months.

PSC will be tracking and reporting on this regularly in the coming months, so stay tuned!