Eye on the States: What color is your customer's money?

Thomas Davies

Having trouble getting your state and local customers to commit to more spending this year? A recent fiscal survey sheds some light on why. The National Association of State Budget Officers is projecting a flat growth rate for all state budgets in fiscal 2004 except for Alabama, Michigan, New York and Texas. This contrasts with an average annual historical growth rate of 6.2 percent.

But the flatness in budgets masks varying rates of growth in different money sources. Depending upon which source your state customer uses, its budget for IT could increase significantly.

This is why experienced state and local officials always want to know, especially in tough times, what color of money is being used. Because the color of the money -- that is, the source of funding -- makes a huge difference in how much is available and on what it can be spent.

General fund spending is the best example of this. It refers to money that originates with tax sources such as sales, personal income and corporate. General fund monies are not earmarked for specific purposes, and are used primarily for ongoing operations of state government.

This can be both good and bad for IT spending: Good, because general revenue funds can be used for any purpose, such as statewide enterprise resource planning implementation. Because general funds are expected to recur from one year to the next, this can give state officials the confidence to make multiyear commitments.

However, general funding can be bad, because it may instigate internal rivalries among state agencies competing for these funds.

General revenue dollars also are highly dependent upon the state's overall fiscal health. When the economy goes south, these funds feel it earlier and longer. Because their growth is also dependent upon increases in politically sensitive state tax rates, increasing this source of revenue when times are bad, especially in an election year, can be political suicide.

There's another reason general-revenue-funded IT projects are feeling the pressure: Critical state needs that also depend upon these funds are growing disproportionately fast. Medicaid leads this pack. This health insurance program for the elderly, poor and disabled now has more beneficiaries than Medicare, and its expenditures are growing more than 10 percent annually.

Medicaid's growth is adding pressure to other general funded IT projects, as legislatures shift funds away from their programs and toward health care.

This answers a lot of questions: why administrative agencies responsible for personnel, accounting and finance have been scaling back their ERP plans; why agencies, such as law enforcement and public safety, are struggling to find much-needed funding for statewide communications modernization projects; why routine replacement of desktop systems has been extended years into the future; and why many state chief information officers are struggling to keep afloat.

It also explains why companies are desperate to find market opportunities that are not dependent upon general revenue funding.

So what looks attractive? For one, opportunities that are financed primarily through federal grants. Also, trust-funded projects, in which money is marked for special purposes and cannot be shifted. Such funds might include seized drug monies that are used for records management systems.

Another safe harbor is IT spending funded by fees, such as that from the sale of drivers licensing records or issuing licenses.

So as you plan for fiscal 2004, don't forget to check out the color of your customer's money.

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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