State And Local Picture Worsens, But Efficiency-Minded VARs Go To Front Of The Line

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It's July, and that means 46 states have begun a new fiscal year. And there's no point in sugarcoating the truth about state and local budget crises.

All but five states -- Montana, Nebraska, North Dakota, Texas and West Virginia -- have budget deficits going into FY2010, according to the National Conference of State Legislatures. Twelve of those 45 states have budget gaps worse than 10 percent, and 11 of the 45 have budget gaps worse than 15 percent. It's ugly out there.

"The bad news is everywhere and has been so for several months. State and local governments have been hammered for lack of a better term, and hit on all fronts in terms of revenue shortfalls," said Chris Dixon, manager of state and local industry analysis at public-sector IT researcher Input, on a recent Input Webinar devoted to state and local spending outlook. "While the federal stimulus has been a nice addition -- think of it as a year of grant funding in between 2009 and 2010 -- it provides a really small breather for state and local governments and provides targeted benefits at best."

State and local revenue sources are part of the pain. According to Input, income tax revenues at the state and local level were down 26 percent in 2009, corporate income taxes were down 15.5 percent in the fourth quarter of 2008, and general sales taxes were down 6.1 percent in the fourth quarter of 2008. Only property taxes held stable, Dixon noted, but that was because of increasing rates to make up for declining property valuations. What's worse? Input's projections suggest revenue stabilization -- which is not the same as an upturn, Dixon noted -- won't even be a possibility until 2011.

"It's all well and good to talk about how the market's going down, down, down," said Dixon. "But that doesn't provide you with much forward-looking perspective. Input predicts that states and localities will have come up with some combination of $250 billion in recurring taxes and fee increases and spending cuts between now and 2013 for their spending levels to align, by 2014, to the types of revenue growth we saw from 1991 to 2003."

There are other factors at play, too, including an increase in what Dixon called service-demanding populations -- those under 18 and those into retirement -- which will be growing faster than the working population.

"Regardless of the recession, people don't stop retiring and the kids don't stop showing up on the first day of kindergarten," Dixon said. "Increasing efficiency in all areas isn't going to be accomplished without some significant level of IT investment."

"More with less" and "better efficiency" are precisely the two areas where VAR prospects for state and local deals begin and end. Input's data suggests outsourcing, software, services, communication/networking and computer equipment are all growing segments in public sector. State and local governments have to become more efficient, and carefully targeted technology investment is how that's accomplished.

"Budget gimmickry will come to an end in 2010 when the tricks run out," said Dixon. What he meant by that was that states and localities are down to the bottom of the barrel in terms of the number of positions and line items they can cut without completely restructuring the way they operate.

Dixon's advice to VARs, then?

"Very few decision-makers have any real indication of what their budget forecast is," he said. "They've only recently begun to arrive at that turning point, and they're forced to make real budget cuts and revenue increases. Cast your net widely to catch as many fish as you can. It's in some of the least predictable pipelines where the projects might be.

Above all, Dixon argued, remember that the American Recovery and Reinvestment Act is a one-time shot in the arm. Solution providers need to look beyond quick-fix stimulus money solutions at areas that will require long-term investment.

"Keep an eye on long-run, non-stimulus properties: K-12 school consolidations, regulatory reforms, revenue reliability," Dixon said. "Do not use a one-size-fits-all business-development strategy. Everyone's budget is bad, but some are worse than others. Some will find their footing sooner than others."

Next: VARs Make The Difference In State And Local Deals

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