Eye on the States: Money in the budget isn't cash in your hands

Thomas Davies

Scanning the headlines tells you that, depending upon whose numbers you believe, state and local governments spend between $46 billion and $50 billion annually on information technology. This puts the market up there with other heavyweights, such as global manufacturing and financial services markets.

But you must delve into the stories to find what you really need to know: where the money is going, and what it means for you.

Let's take a closer look at what the numbers represent, using $50 billion as a starting point. This figure isn't an estimate of the annual purchases of technology or related services by state and local governments. Nor is it the value of IT-related contracts likely to be awarded by state and local government this year. Quite simply, it's an estimate of the total annual IT budgets for state and local governments, and budgets are not the same as purchases, expenditures or awarded contracts.

Confused? Consider what goes into the IT budgets of state and local buyers. One of the largest components is the salaries and benefits for government IT workers. Personnel costs for government workers probably account for at least 30 percent of the overall IT budget. Subtracting out these costs reduces the $50 billion baseline to about $35 billion, which roughly approximates the monies available for purchasing IT goods and services.

However, not all of the $35 billion is available for purchasing in any one year. To see why, take IT services, probably the fastest growing component of state and local technology budgets, as an example.

Services, including consulting, software development, training, maintenance and other professional and IT services, account for about 25 percent of an IT budget. So about $12.5 billion of the $50 billion potentially is available to state and local governments for purchasing professional and IT services.

I said "potentially" because much of the $12.5 billion in any year is spoken for by commitments made in previous years. When times are good, state and local governments initiate IT projects that result in multiyear budget commitments, such as large-scale finance and human resource systems.

This is not the same as multiyear budget obligations, because in many jurisdictions, "obligations" have legal implications and only can be made annually.

When awarded, these multiyear projects fuel growth in total contract value and contract backlog for companies. But when fiscal problems emerge in the states, these same commitments act as fiscal straightjackets, leaving little monies, if any, for new discretionary projects until growth in tax receipts picks up.

Consequently, it's not unusual in periods of sustained fiscal stress, such as the states have been experiencing the past few years, for only a very small percentage of the $12.5 billion for IT services to be available for discretionary purchasing.

The next time you see a big number flashed in front of you, and you decide to go for the gusto and ramp up your investment in the state and local government market, dive deeper into the numbers. You'll be glad you did.

Thomas Davies is senior vice president at Current Analysis Inc. in Sterling, Va. His e-mail address is tdavies@currentanalysis.com.

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