California Budget Crisis: Not All That Glitters Is Golden

When Gov. Arnold Schwarzenegger on July 28 signed a package of bills to finalize a long-awaited balanced budget for the State of California, the swift strokes of his pen resolved a gaping $24 billion hole in the state's finances.

Now the real work begins for solution providers and other IT suppliers who face dwindling orders, longer payment terms, the receipt of IOUs instead of cash and customers who don't know what their IT budgets will be.

The crisis, caused by the nationwide economic slump combined with a huge drop in state tax revenue and a huge growth in spending mandates voted in by the citizens of the state, has already taken a toll on the business of solution providers with operations in California.

That toll has yet to be measured as solution providers face uncertainty on a variety of fronts.

IOUs And Freezes: Trying To Measure The Impact

The State of California, which if it were a separate country would have one of the top 10 economies in the world, is just too big to ignore as a potential IT customer.

While an exact figure for the amount of IT spending by the state is hard to come by, the California State Controller's Office estimates it has about 130 CIOs in various departments based in the state capital of Sacramento.

As a result, the California budget crisis is having a big impact on solution providers, said John Riley, co-owner of Sacramento Technology Group, a Folsom, Calif.-based solution provider.

"The economy is down, which causes budget freezes," Riley said. "So everybody hangs on to their pocketbooks."

One of the most immediate impacts from the crisis is the payment of IOUs for work completed, even for ongoing work budgeted before the crisis started.

Big IOUs, and how they will be repaid, can be a problem, Riley said.

"The Controller's Office has to get the cash agreed to in the budget," Riley said. "While the state promises to pay back the IOUs in October, there is no guarantee. Does the budget include paying off the IOUs? It's hard to say."

Valley Network Solutions, which sells mainly products along with some cable and fibre to the state government, has already started receiving IOUs, said Daniel Duffy, CEO and CIO of the Fresno, Calif.-based solution provider.

That in itself is not such a concern, as the solution provider deals with a wide variety of customers. The biggest concern, Duffy said, is the trickle-down effect on spending in the state.

"We lost one hospital customer because it lost funding from the state," he said. "We weren't surprised. The hospital had been paying its bills late, and not communicating with us. We're OK. I'd be more concerned if I was a product-heavy VAR based in Sacramento. I don't know how those guys can survive."

Riley said that the trickle-down impact may be huge, but as yet is hard to measure.

"We have a lot of different types of customers, such as parks and recreation, and counties," he said. "They're still trying to figure it out. And when they figure it out, we'll figure it out."

Along with the IOUs, the state has been slowing down its payments, with a lot of purchase orders now being paid in 90 days as opposed to the traditional 30 days, Riley said.

The budget crisis has also changed the way state government departments approve new projects, said Terry Joslin, president of Western Blue, a Sacramento, Calif.-based solution provider.

In the past, departments could handle IT purchasing by themselves, but since April or May they have had to submit a plan for all IT projects to the state's CIO and Department of Finance, Joslin said.

As a result, the normal buying cycle is in jeopardy, Joslin said. "In July and August, we traditionally clean up existing projects," he said. "By September, we're looking at new business. We can't say if September of 2009 will be better. I wish I could calculate that."

State-mandated furloughs are impacting specific solution provider personnel, especially on the services side.

For instance, the state government has mandated a monthly three-day furlough for all employees as a way to cut costs. That furlough also has been extended to the personnel of contractors who provide services to the state government.

That is a big issue to many solution providers, said Rand Morimoto, president of Convergent Computing, an Oakland, Calif.-based solution provider.

"There's only 22 working days per month," Morimoto said. "We can't have people being asked to take three more days off. You can't find random work for them for three days."

Jeskell has enough ongoing projects to keep its people busy even on days when the state's personnel are on furlough, said Dan Serpico, president of Jeskell, a subsidiary of San Francisco-based FusionStorm.

"While it's probably optimal to have someone working five days a week at one place, we can do cross-training, or ongoing certifications," Serpico said. "If we were a smaller organization, maybe I'd be more worried. But we're healthy, and sell every product IBM has out there. We have the opportunity to redeploy our people, even if it's not always easy."

Other solution providers have had to stop working with the California state government altogether.

One of those was Convergent, which Morimoto said pulled out of state business last year because of the looming budget cuts but is planning to return once conditions improve.

"In spring of 2008, California was already in a budget crisis," Morimoto said. "The $24 billion budget crisis last year was already a $13 billion budget crisis. One project we had was 40 percent finished when we were told to go home. Other projects didn't go into expected next phases."

Morimoto said Convergent was actually fortunate because it is not based in Sacramento, and it did not depend on state government as a primary vertical. "I know a few companies in Sacramento who can't pull out from state spending," he said.

Not Everyone Impacted Equally

For solution providers serving certain parts of the state government, the impact has not been felt as strongly.

For instance, three of the state's largest organizations -- CalPERS (California Public Employees' Retirement System), CalSTERS (California State Teachers' Retirement System) and the State Compensation Insurance Fund (SCIF) -- have their own revenue streams and so are not subject to the new budget cuts, although their spending is being squeezed, said Matt Cummins, enterprise account manager at Lilien Systems, a Larkspur, Calif.-based solution provider.

Lilien calls on all three organizations, Cummins said. For those three organizations, business comes in waves, and is very much project-oriented, he said.

"The accounts we call on have their own revenue generation, so they are paying their bills as before," he said. "As of right now, we have no outstanding balance with the State of California."

Serpico said that, while Jeskell is seeing some impact from the California state budget crisis, its commercial business is holding steady and its federal government business is booming.

"We are already comfortable in the government space," Serpico said. "Making the transition from state to federal is easy for us."

Jeskell gets about 15 percent of its business from the State of California, a percentage that has changed little in the past two years, Serpico said.

It has been able to mitigate the impact from the crisis by working on projects for which the budgets have already been allocated, and on projects designed to save the state money in the long run, such as server consolidation, he said.

VARs: How To Fix The Mess

Looking forward, one way the State of California could save money would be to change the way it contracts IT products and services, Cummins said.

California's IT procurement goes through a number of contracts.

These include the California Multiple Award Schedules (CMAS), which lets suppliers sell to the state using their Federal GSA contract; the Western States Contracting Alliance (WSCA), which lets government agencies from 14 states cooperate in sourcing of products and services with no specified vendors; and the California Strategic Sourcing Initiative (CSSI), which allows agencies to source products and services on a non-bid basis.

The CSSI was set up to control costs and standardize procurement by limiting suppliers to a handful of companies that in theory are expected to aggressively and competitively provide products and services, Cummins said.

Aside from that select few, the only other companies that can bid for contracts under CSSI are minority or disadvantaged suppliers, he said.

One purpose of the CSSI was to standardize government purchases, such as Hewlett- Packard for Windows-based servers and EMC for storage, Cummins said.

"If it were up to me, I'd want as many vendors selling as possible," he said. "It might be more cumbersome, but it would be the fastest way to save money and get everyone selling on the same standards."

While the state is not spending now, there is a lot of pent-up demand, Morimoto said. The problem is, it might take another six months to a year for spending to restart.

"There will still be some money in this new budget," he said. "There will be a lot of projects. There's a lot of infrastructure to put in place. I expect some business to come back this fall."

That business will come from technologies that help cut IT costs, such as virtualization and consolidation, Morimoto said. "A lot of departments will be looking to save costs by doing IT smarter," he said.

A lot of customers with state funding are tightening their belts, but they tell Valley Network Solutions that it is the one item they won't cut, Duffy said.

"We support them, and help them cut costs," he said. "Either we are their IT staff, or supplement their IT staff."

Fundamentally, the state is a good investment, Serpico said.

"The problems today are temporary," he said. "We're healthy enough to make the necessary investments, and healthy enough so if the IOUs continue we can make our payrolls."

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