State, Local Governments Poised to Loosen Purse Strings

Federal spending is set to decline significantly in 2013, but the IT industry sounds bullish on the state and local market.

by / July 9, 2012

For resellers and solution providers catering to the public sector, 2013 may hold little cheer, as the Gartner consulting firm has forecast an 8 percent cut in federal IT spending, the biggest drop in 12 years.

Yet despite this feared spending cut, integrators will find a bright spot in projected state and local sector spending, which is expected to grow, albeit modestly, for the next two years at least, experts say.

Unable to stall necessary programs any further, and spurred by improvement in the overall economic climate, state and local governments already have ramped up their spending to pre-recession levels.

"Money is also flowing into projects that were delayed for what I would call efficiency projects,” said Aaron Zeper, vice president of sales and marketing at Signature Technology Group, an IT solutions provider catering to the government sector. “[And that means] we are seeing launch of extra projects as well that focus on improvement of services to the public and the end user experience."

Zeper said that state and local governments have become more flexible and have started reacting more quickly than the federal government. “When they don’t have the money they don’t spend it, but when they have the money they do not sit on it,” he said.

According to Gartner, state and local government IT spending is expected to reach $55.4 billion this year, then up to $56.6 billion in 2013, before climbing nearly 5 percent in each of the following two years — hitting $59.4 billion in 2014 and $62.1 billion in 2015.

The increase, although relatively modest, reflects optimism by state and county officials about their financial and economic situations, said Chris Dixon, state and local industry analysis for Deltek, an IT services firm.

“Although the pain of across-the-board budget cuts has stymied IT spending, more and more of deferred IT investments are also coming due. For instance, hardware lifecycles have been stretched to the breaking point while government streamlining efforts, particularly agency consolidations, require IT integration …permanently short-staffed agencies are automating analog processes to boost productivity and these are the major trends driving the upswing,” said Dixon.

 “Suddenly there is also a lot more interest from the state and local government departments to ensure efficiency,” adds Zeper.

Even as local IT budgets have remained more or less constant, “the increased money is flowing — from freeing a lot of internal capital through increased efficiency, elimination of need, by way of renegotiating with suppliers, and by consolidating data centers and shared service,” he added.

Opportunities Abound

Deltek sees varying rates of growth in all areas except for state-level homeland security programs. Market-leading categories of spending includes education, health care, justice and public safety, social services and public finance.

Higher education has seen robust enrollment growth in recent times and that has called for increased IT infrastructure investment as well, added Dixon. 

Hot opportunities also exist for solution providers in the state and local government space of big data and analytics as well as cloud computing and mobility.

“Every government faces the same problems, more or less,” said Dixon. “For states, it’s education and health-care spending. For localities, it’s public safety and infrastructure. These concerns are not going away any time soon, hence any vendor with a solution that can capture new savings or revenue that can be reallocated to citizen service in these areas will get a hearing. That’s what governors, mayors, and county commissioners care about,” he said.

Nagging Doubt

Nevertheless, the lingering question is, how long is this upward trend expected to last?

Some wonder if the threat of sequestration — automatic 10 percent federal budget cuts — looming in January could also spill over to state and local government IT spending. Dixon thinks the current IT spending of state and local governments is much like the electric bill: “You can trim it, but you can’t cut it off.”

He is optimistic that the growth rate can remain at or near this level in coming years because “the current market growth rate of 3.1 percent is just about two-thirds as vigorous as we saw prior to the economic downturn.”

“As long as government is open for business, IT systems will have to be up and running,” says Dixon.

However, assuming the worst, if cuts in the federal sector does push the growth rate back down, “it would be marginal,” he says.

Indrajit Basu Contributing Writer

Indrajit Basu is an international correspondent for Government Technology's Digital Communities.